Forum Partners in Hong Kong has announced final closure for its second Forum Asian Realty Income Fund. The final tally of the fund amounts to $600 million, and along with ForumÆs first Asian fund and its pair of European-themed property funds, it brings ForumÆs assets under management up to $2 billion.

This closed-end fund has a 10 year life and targets returns of 20%. On its other funds, historical returns have been 40%. Fees for this fund have not been disclosed but are reportedly around the usual industry pricing level. Institutional investors in the fund include large European and American pension funds such as PGGM and Texas Teachers.

The Forum funds obtain their property exposure by indirect means. They do not buy buildings, but invest in small/mid size property companies. In Asia, approximately 75% of its investments are not listed. Listed property companies have performed very well in the region, which is pushing up the pricing multiples for private property companies, although the private company is inevitably valued at a lower overall level.

ôThe growth in public markets is creating a new benchmark for pricing of risk,ö says Russell Platt, CEO of Forum Partners in Hong Kong. ôThere is a permeable barrier between public and private markets for people, real estate assets and capital. There exists a valuation arbitrage as a private property company moves towards a public listing.ö

Half of the new Forum fund is already invested or committed. The plan is to have a portfolio of 10-15 companies, focusing, in order of priority, on China, India, Singapore and Korea respectively. Two-thirds of the fund will be directed towards property development companies, with the remaining third going to investment property plays. About 60% of the fund will be in the form of residential property exposure.

They are looking for investments where the property company has some niche specialty in the type of buildings it develops, or a specific regional focus. However the future plans of the company may see it striving to expand its scope geographically, using the money injected by Forum.

In its investments, Forum is positioning itself across the capital structure with a mix of senior or subordinated debt plus warrants/convertible securities or some other participation feature. Nevertheless, it wants to live up to its name and generate recurring income. On average, it has managed to pay out coupons of 10% to investors, and has found that investee companies can afford to make such payment, perhaps not across their entire capital structure, but on their debt portion of it.

In finding real-estate special situations for companies looking for expansion capital and ones in due course seeking to approach the capital markets for the first time, Forum sees itself as acting as a venture capitalist to the Asian real estate markets. It tries to find the kind of companies that need its assistance in getting its asset base up from $500 million to $2 billion.

In general, Forum is trying to find a place within the capital structure that often is not catered for by straight equity or conventional bank lending, and the size of its tranche might amount to 10-30% of the overall capital of the company.

Bearing in mind that bank lenders have probably hogged all the decent fixed asset collateral and are keeping property title deeds firmly in their vaults, Forum often looks for credit protection in the form of financial covenants, for example for asset coverage and cashflow and other bog-standard protections such as negative pledge clauses. It looks to supplement these by taking pledges of shares owned by the company owners in asset holding subsidiaries.

ôNo deal structure is good enough to survive bad people running the company, and thereÆs no such thing as a perfect alignment of interests between the entrepreneur and the financier,ö says Russell Platt. ôWe avoid the over-confident property entrepreneur where deals are often characterized by over-ambitious repayment schedules. You frequently find hedge fund driven deals that demand repayments that prove much too optimistic; they are looking for liquidity in a business that is often illiquid.ö

Forum seeks pre-defined exit strategies, and doesnÆt see itself as a corporate financier of infinite duration. Three to five years per deal is about the average timeline.

When contemplating an exit via IPO, one important factor that Forum considers is whether the management of a property company can function as stewards of a publicly listed company. One is mindful that entrepreneurs of the property tycoon-type can often be a tad spivvy in their personal deportment. Forum finds that most land barons canÆt make that transition.