Shui On Construction and Materials (Socam), the listed subsidiary of Hong Kong-based real-estate developer Shui On Group which is known for projects such as Shanghai’s Xintiandi area, has launched a private-equity business.
Socam and its fund management joint venture Tan-Eu Capital, run by Rachel Renucci-Tan, plans to raise assets and manage a private-equity fund dedicated to Chinese property special situations.
Tan-Eu has just closed the SoTan China Real Estate I Fund, raising $195 million from two European pension funds (one of which is reportedly very big). It will co-invest with Socam on deals on a one-to-one basis.
The LP is able to deploy leverage, creating a $800 million potential pool of capital, says Philip Wong, Socam CEO.
This is SoTan’s first investment vehicle. Shui On sees rising opportunities in the special-situations area of property as Chinese authorities tighten rules around property development. (Shui On Group's other listed entity, Shui On Land, also manages China-focused real-estate funds.)
Wong defines special sits as including supporting incomplete projects or stepping in if a project’s existing shareholder encounters financial distress. SoTan can step in with capital at a discount and improve how the underlying asset is managed.
Wong first joined Shui On in 1979 on the construction side of the business. He left in 1992 to pursue property M&A transactions, before returning in 2005 to spearhead Socam’s special-sits business. The company wanted to find a way to expand its role in special sits and build its portfolio, as it expects the next two years to throw up many new opportunities. But Socam as a developer has limited capital it can deploy in this manner.
So it decided to set itself up as a GP, which not only can attract third-party capital but also create a new fee-based income for the parent.
It needed a fund manager, but Socam executives were worried about the poor track record of many large investment funds and investment banks during the global financial crisis. Nor did it want to pay exorbitant fees to a private-equity giant.
Socam decided to go with a boutique, and launched Tan-Eu as a joint-venture specifically to manage funds with third-party investors. Last year, Tan-Eu hired former Schroder Property multi-manager James Buckley as executive director for investments.
The SoTan fund’s mandate is to invest in second-tier cities, seeking special sits in residential and mixed-use developments. The fund has a six-year lifespan but this can be extended by an extra year if the LPs agree.
Capital must be deployed within three years, but Wong says SoTan may be able to have everything invested within two years, noting that many local governments approach Shui On for a variety of projects. The fund is expected to generate internal rates of return in the mid-teens.
Wong says SoTan will look to launch a second fund once it has fully deployed the capital from the first.