Gaw Capital to make final close of Fund VI by Q2 next year

Kenneth Gaw, President and Managing Principal of Hong Kong-based real estate PE major Gaw Capital

Hong Kong-based private equity firm Gaw Capital is eyeing a final close for its $2-billion sixth opportunity fund not later than second quarter next year, a top executive told DEALSTREETASIA.

The investment firm recently made the first close of the fund at $1.3 billion and secured another $650 million for a sidecar vehicle.

When it comes to deals, Gaw Capital claims to face the problem of abundance – it has already deployed half of what it mopped up for the first close for the sixth fund and a massive deal pipeline means it can pick and choose its upcoming transactions.

“We just did a $1.3-billion first close and we have already invested half of that in the last few months. I have a big pipeline of deals, and in fact right now, I am thinking which deals to turn down,” Gaw Capital managing principal and president Kenneth Gaw told DEALSTREETASIA in an interaction recently.

He added that with one-third of the total fund size already invested, the firm will follow its typical deployment period of about two years for each vehicle.

The firm had launched the sixth fund — Gateway Real Estate Fund VI — in July this year and expects to make a final close by the first or second quarter of next year, Gaw said, adding that the fund has also created pockets for a core plus fund and co-investment opportunities in the sidecar.

The fund will invest in properties in Greater China, Japan, South Korea, Australia and Southeast Asia.

Gaw also noted that unlike the past, when the firm’s funds had a 70:30 split between its Greater China and rest of Asia investments, the sixth fund will be split equally between these markets.

Established in 2005, the investor has raised five commingled funds targeting the Greater China and APAC regions. It also manages value-add/opportunistic funds in Vietnam and the US, a pan-Asia hospitality fund and a UK creative office vehicle. In addition, it provides services for separate account investments globally. Gaw Capital commands assets worth over $17 billion.

Last week, a Gaw Capital-led consortium bought a portfolio of 12 shopping centres for HK$12.01 billion ($1.54 billion) from Link Reit, Asia’s largest real estate investment trust. Last month, the firm acquired Ocean Towers, a 25-storey Grade A office building in Shanghai.

Meanwhile, in terms of exits, Gaw said the firm had clocked $2.5 billion worth of exits this year, including significant ones in China where it sold the Pacific Century Place in Beijing, and concluded a logistics platform deal.

Edited excerpts:

Could you give us an overview of where you are in terms of different funds and also as a group?

We have a few products. In Asia, we have a discretionary fund for pan-Asia and this one is in the series of funds as number six. So the latest one that you have seen us fundraising is number six. We raised $1.3 billion in the main fund and $650 million in the sidecar. We have a US fund, which is fund number three, that closed at $450 million and then we have an Asia Hospitality fund, another Asia fund, and the Europe fund through which we recently went into Spain. Then we have a bunch of separate accounts and have a lot of office buildings in London and the US, the Inter Continental Hotel in Hong Kong and others. Also, we have a small Vietnam vehicle.

You are a China and Asean player but you also have a US fund. What regions are you most bullish on?

We like Vietnam for good growth, Japan for strong cash flow, a low interest rate and low vacancies, a good residential market and stable income. As long as the Japanese Yen stays weak, the hospitality business will be good. We also like Singapore for the current cycle; it is the only place in Asia that really went down in value in the last five years. Much of the value being down was because of the government policy and not because of macro [factors], so there is a lot of liquidity on the sidelines ready to be invested and the office market has turned a corner as there is no new supply coming up. Residential in Singapore is also going to be good but one has to watch for the coming elections. The government has been well ahead of the curve in keeping the price down. Otherwise, with the time in the cycle, Singapore is quite unique in Asia. Generally, we like these three markets.

In China, we face short- to medium-term headwinds. However, in the long-term, we like it. It is one of the largest markets in Asia and the macro trends like the growth of the middle class and consumption are pretty much intact. With the trade war here already, the government has no other option but to focus on domestic consumption growth since exports are going to be weak.

We have been doing that for the last couple of years, so we have a logistics platform with Allianz. Big cities like Beijing and Shanghai in the long term are going to be pretty strong and then the government is putting a structure in place in the Greater Bay area.

With all the markets that you talked about, what would roughly be the distribution for fund six in these markets?

In the past, our funds were invested at least 70 per cent in Greater China and 30 per cent in non-Greater China. This sixth fund will be 50:50, 50 per cent in Greater China and the rest anywhere in Asia.

So fund six, when do you expect to see the final close?

Probably first to the second quarter of next year.

The real estate funds in this part of the world closed at a much higher value than what they intended to raise. In your case where do you see the final close happening?

We are capping it at $2 billion for the main fund and then we have a sidecar vehicle where we have raised $650 million. It is in line with how we invested in fund five. In fund five, we raised $1.3 billion in the main fund and together with co-investments at that time we ended up at about $3 billion in capital.

Many funds choose co-investments according to the mix of limited partners (LPs). What is the mix for you?

There are a few LPs who specifically look for co-investments. Where we have large deals, we call a few. A lot of LPs say they want to do co-investments but really only a handful are equipped to do it. We need the team on the ground for making co-investments.

How has the private equity real estate landscape changed today in Asia and specifically, in China? There are a lot of global funds raising standalone vehicles for China and Japan. How does that change the overall play?

When we first started, people wanted us to concentrate on China because they see us as China experts. When we wanted to expand to other markets like Vietnam and Japan, LPs were initially not comfortable. But over time we have done deals and we are proving to them we can get good results. The last five years, the best returns have been [in] Japan, Hong Kong and Vietnam. People are more comfortable expanding into these markets.

Some of the large LPs have standalone offices and teams. How has the entry of such players changed the private equity scene?

Of course, it becomes more competitive and you have seen the trend coming down, at least the expected return coming down. In Southeast Asia, there used to be maximum 20 per cent IRR and then they have to deal with 15 to 18 per cent IRR. It also pushes up valuations. I typically look at deals with certain criteria – location, value and whether we can add value and if I can get two out of three it is a good deal. Generally, if you have the ability to add value to assets, it is still a good deal.

Do you have plans to raise core or core plus vehicles in Asia?

In this round of fundraising, one of the sidecar vehicles is for core plus.

In terms of core or core plus vehicle, it is all about picking up the right asset. Where would it be in Asia?

For Asia, it would be in Japan, Australia, Hong Kong or Singapore and some of the main cities of China and Korea. We have been doing a lot of that in London.

For steady returns, what are the sectors you are bullish on – hotels, student accommodation, co-working, etc.? 

Core would be very specific to investor appetite. About 90 per cent of investors looking for core are looking for offices. Occasionally, there are some who are interested in hotels. For example, we bought the Intercontinental Hotel in Hong Kong.

What are the other trends you are seeing in the core plus space?

Some of the alternative real estate investors have now also become interested in assets like logistics platform like the one we did with Allianz. We have seen that happening in the US where core investors go into that kind of assets.

In terms of LP allocation, what kind of shift have you seen in Asia? 

I do not know the actual percentage of allocation but for sure it is an increased allocation. For Asian LPs, wealth funds and pension funds, they have been very low so we will be seeing a lot of growth coming from that sector. Earlier, when we started our business in 2005, most LPs were from the US and Europe and today, a lot of them are from Asia and the Middle East.

Overall, where are you with your pan-Asia hospitality fund?

It is fully invested but it is not a big fund, $150 million. It invests alongside our main fund. Every time we find a deal with the main fund, we would go 50-50 with that fund.

In Southeast Asia, are there other opportunities like Indonesia or any other plays?

In Southeast Asia or rather Asia, we have been active in Singapore, Vietnam and Australia. I am originally from Thailand so I have legacy assets in Thailand that I own but it is not in the funds. We have hotels in Thailand and Myanmar, so we know those markets. So far, it has not been the focus of our funds but we are starting to look at places like Indonesia which has a good macro. In Indonesia and Thailand, there are elections coming up. We did see how elections can change things in Malaysia, so we want to see how it plays out there.

How have the exits panned out for you in the last couple of years?

It has been good. We did $2.5 billion of exits this year, including big ones in China — we sold the Pacific Century Place in Beijing, we just did a deal in a logistics platform in China. Exits have not been a problem.

Will it become a pain point due to the trade war and the liquidity issue in China and the capital controls? 

I don’t think so. Because of the trade war, the RMB is also becoming weaker and we have seen that it is a lot more difficult for capital to go out of China. That means a lot of liquidity remaining in China and that could drive more domestic deals, so one can sell to local players. Our deal in Beijing recently, we exited to a local player. Other markets like Hong Kong, Japan, Korea and Singapore are all very liquid markets.

Many real estate players are now looking at the credit space. Are you looking at that too?

We are interested in that. In our latest fund, we have a pocket of money for debt and it would be about 10 per cent of the total fund size. We have a lot of investors interested in that space and we have started debt deals in the US and most of those interested are Asian investors. If we find large debt deals, we can invest from the fund. Right now, I would say the most interesting place for debt in Asia is Hong Kong. There are deals that people in China committed offshore and they could not get the money out, so today it is the most interesting place.

Do you also see going forward more distressed space focused vehicles coming up in Asia? 

The only place we have been able to buy distress is in Korea. The country had a lot of corporate and political scandals, so there was quite a lot of restructuring of corporations. We bought a few assets from banks. We have formed a vehicle in China, a JV where we are looking at distressed assets in the country. In six months, there will be a lot of distressed assets coming up because the government is very focused on de-leveraging and monetary tightening. They do not mind compromising on short-term growth for the long-term benefit of the economy.

How about India?

It is an obvious market that we should go to and today I do not have the right resources to put into that market. We have put into our fund that we can invest there too but I don’t think it will be a big focus unless we find the team and resources.

Would you go in with a local partner in India?

Of course, I did that in Vietnam.

Would you also look at distress in India?

I looked at hotels. They have not been doing very well in the last ten years in India but the pricing does not seem to be distress yet.

Everyone talks about the dry powder and the fund sizes getting bigger. Are there enough deals for this pile of dry powder?

I hear a lot of players raising bigger funds but it is still limited to a handful of players. Also, there are certain sectors that are going fast like a lot of money is going to logistics and that can absorb a lot of capital.

So, can Asia be the answer to the dry powder problem that the industry faces? 

I don’t think it is a problem. We just did a $1.3-billion first close and we have already invested half of that in the last few months. I have a big pipeline of deals and in fact, right now, I am thinking which deals to turn down. It is half of $1.3 billion which is one-third of the total fund size. Our typical deployment is about two years for each fund.

What is the status of the Europe hospitality fund?

We have invested in a hotel in Portugal and a string of hotels in Spain. It is about a third deployed and it is a EUR 200-million fund but we like Southern Europe because the labour costs are low due to large unemployment and a lot of young population. Room rates are relatively cheap, so the capital value is also relatively cheap. These are very attractive tourism destinations, especially for the upcoming emerging market.

You have been a traditional investor doing real estate. Do you see yourself investing in the new wave of investments in property tech and others?

In our latest fund, we also have a pocket that is allocated to proptech and operating companies that are related to real estate even though they do not own real estate. We have invested in that. In fund five, we invested in co-working. We invested in a company in China that was recently sold to WeWork. So we continue to look at those opportunities. We also invest in co-living or hub apartments in China and we recently invested in the largest property listing platform in the country.

Co-working has become very big and co-living is also becoming big. We will see consolidation in co-working with the bigger players gobbling up the smaller players and that would be a natural trend. Not all of them can make money and most importantly, not all of them can continue to waste money.

Going into 2019, what concerns you?

The biggest concern is inflation because it looks very benign but if it surprises people on the upside, then the interest rate will go up faster. I would say just a month or two ago, I was even more worried than today. At that time, we were seeing US wages going up and oil was high. A trade war is generally inflationary. It is something to watch for. The trade war is also a concern so I would be more concerned about how the two governments react to the trade war.

Also Read:

Gaw Capital-led consortium acquires HK shopping centres from Link REIT for $1.54b

Gaw Capital to exit four Vietnam assets bought via special vehicle by 2020

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.