Hong Kong-based investment firm EXS Capital, which specialises in building private equity real estate platforms, has a unique approach to private equity – building up the platforms along with the management teams on a deal-by-deal basis. The model has yielded good results, according to its founder and CEO Eric Solberg.
The Asian market is volatile, and the fundraising cycle of closed-end funds challenge the traditional model to make the best of their investments, he opines.
“If you have a closed-end PE fund structure, you are generally only able to raise money when markets are going up. Then you are under pressure to buy when the markets are high. And in order to raise the next fund, you may have to sell your best companies too early, in order to show realizations. In Asian context, our experience is that traditional US-style PE funds have incredibly low survival rate,” Solberg explains.
Meanwhile, all of the projects backed by EXS Capital have been profitable and produced more than 25 per cent IRR for the firm’s investors.
In Vietnam, EXS Capital started to invest in SonKim Land in 2012, and has since then helped the company raise $84 million. The PE firm expects to raise $100 plus more for the Vietnamese developer and lead it to an IPO where it could become the top three listed real estate company in Vietnam.
SonKim Land was a signature deal for EXS Capital, Solberg told DEALSTREETASIA in a recent interaction.
Eric Solberg is a speaker at DEALSTREETASIA’s flagship event, ASIA PE-VC Summit 2017.
What is the approach of your company? How has fundraising and deployment been?
We are a very non-traditional private equity firm. We do not raise funds but put together on a deal-by-deal basis, establishing permanent capital platforms which we generally hope to list as IPOs or REITs. We focus on partnering with leading management teams to create and build real estate platforms. And we always invest our own money first, taking equity and a management role in each platform. So we are different from the rest of the PE crowd in a number of ways.
We’ve built a very nice track record, having put $650 million to work over the past 10 years, with every deal so far producing positive returns for both our investment and management partners. But fundraising is accelerating, so over the past year we have raised $246 million. For the next 12-18 months, we hope to put together around another $500 million plus.
We were more like an advisor in our early deals, 8-10 years ago. Then, 5-6 years ago, we evolved to be more of a fund manager. Now we’re more like a serial entrepreneur, with the expectation to be deeply involved in the management of our partner companies over the long term, 10-20 years or more. We work at a small number of deals at a time, and generally work on larger transactions. These days, most of our transactions are over $100 million. And, again, we try to create permanent capital vehicles, not limited lifespan funds.
In Vietnam, we have had a long-term partnership with SonKim Land since 2012. In 2013 we brought them $38 million from a collection of Japanese high net worth investors. We brought them $46 million more last year and we are raising another $100 million plus for the company now. Not only have their projects have done very well, but also they’ve built a great management team, brand and reputation under the leadership of Chairman Tuan Nguyen. We’re very proud of their accomplishments and progress.
This is all going to one company. Our goal is to make SonKim Land one of the top 5 listed real estate companies in Vietnam, and we are on track to do that. We look for an IPO over the next two to three years. After the IPO, the market capitalisation of SonKim Land should be around $1 billion, which will be in the same order of magnitude with Vingroup and Novaland – as perhaps the only three real estate companies in Vietnam with the $1+ billion valuation.
A typical PE firm will make a lot of different little investments going in and out, whereas we make a meaningful investment in one company then raise more money, then more over multiple rounds, then go for an IPO, and then beyond that. This is a much more Asian approach, which is to build long term, multi-stage, multi-dimension relationships with a few close partners.
What advantages does it have over traditional model?
I think the problem of private equity funds in the Asian environment is that they simply don’t work very well, in large part because Asia has a much higher volatility. You have a volatile market and limited lifespan funds, this can cause a lot of problems. What if your fund ends when markets are down?
According to our research, the long term success ratio of Asian PE fund managers is less than two per cent, while many Asian family offices have been successful for years and decades. The main difference is structure. There are smart people everywhere. But if your vehicle runs out, it does not matter how smart you are, you’re just dead. Whereas you are a family office, a corporate vehicle or some kind of a permanent capital vehicle, you are able to survive and indeed put money to work when markets are down.
The secret to investing – buy low sell high – is not very complicated. But if you have a closed-end PE fund structure, you are generally only able to raise money when markets are going up. Then you are under pressure to buy when the markets are high. And in order to raise the next fund, you may have to sell your best companies too early, in order to show realizations. In Asian context, our experience is that traditional US-style PE funds have incredibly low survival rate.
What we’ve tried to do is to adopt this strategy which is more like a large, smart Asian family office or Asian corporate. We try to blend the sophistication, analystics and rigorous judgment of US or Western PE firms together with the with local savvy and long-term, value-driven outlook of Asian family offices.
You are also developing a data centre project with $200 million fundraising. What’s the rationale behind this project?
We partner with a very big global asset management group to develop an Asian and European oriented data centre property platform. We have raised series A preferred shares of $200 million and we believe we will fully invest by the end of this year or early next. We will try to raise another $300 million or more in a series B round and eventually we’d like to list it as a REIT in Singapore or IPO in some other market.
The date centre world is currently bifurcated in two groups. One is data centre REITs like Digital Realty Trust and Keppel DC REIT. Another group include tech and telecom companies like Microsoft, Google, Amazon, AT&T, NTT and others. REITs own property, but the tech and telecom companies want to use their balance sheet not to own land but to invent the future. You might think those two groups can be very natural partners. But in fact they are fierce competitors, because they’re chasing the same customers.
Our data centre business, called Stratus, is a non-competitive data centre property platform in a sense that we are not an operator. So we are a much better partner for companies like Amazon, Google and NTT to hold their properties off balance sheet. It has less of a landlord and tenant relationship but more of a capital partner relationship. We think that is a market need that has not been fulfilled.
As a pan-Asia fund, which do you see as the investing trend emerged from this region?
A lot of people are figuring out that the traditional PE fund structure does not work. They are experimenting with different ways of investing in private and alternative opportunities. For example, family offices are not going for PE firms and instead are trying to do it themselves, Likewise, big pension funds increasingly want to do co-investments not go into funds. I think that helps us because we are not raising funds, we ask these family offices, pension funds, endowments, corporates and sovereign funds to invest directly in our deals as partners. The overall fee burden is much lower, it’s much less of a black box, with much better transparency. I think it’s the biggest trend that is going on.
Smart investors have been a little bit burned in China and India. Markets in ASEAN are actually very interesting. Vietnam is one of our favourites. It is growing very fast with great demographics and better government regulations. We also like the Philippines, Malaysia and Singapore where from a real estate standpoint, there is decent value right now.
So what is the adoption of the model like yours? Why don’t traditional PE firms move to this model?
You have global groups like KKR, Bain and Blackstone come in the markets with mega funds. Maybe these global players have better discipline and strong global fundraising capability, so perhaps they can survive the volatility of the Asian markets, but we will see. Most of these global players have only been in Asia, at least with standalong Asia funds for only a few years.
So we don’t know yet. Most of the groups are on their first or second fund, so we will see whether they change the model over time, but we don’t see it in the short term. Their model is still making them a huge amount of money because they are paid 2 per cent on committed capital even before they do anything. We don’t charge any fees except on our invested capital.
From the company side, how is the adoption of capital and corporate management from PE firms?
A lot of Asian corporates have been very reluctant to partner with PE. PE has a mixed reputation. There has been a lot of criticism about PE funds that they come in and want to immediately do an IPO or strategic sale and run away.
We partner for the longer term. Our ideal investment period is 20-30 years. If you’ve got into a great company early, why would you sell it? If our investors need liquidity, we will endeavor to get them liquidity by listing the companies. That will help us further perform in a number of aspects including delivering liquidity to those investors who want it. But we always put our own money into all these companies so we are under no pressure to sell.
How has the Vietnam market been for you? Can it be a launchpad for ASEAN expansion?
Vietnam has been very important to EXS Capital, and our relationship with SonKim Land has been a signature deal. We are very grateful to them for helping us build our track record. The success of that deal has been a launchpad for a lot of things that we’ve done.
We are looking at things like co-working and data centre in the region, and Vietnam is a very exciting market for that. We would love to bring almost all of the things we’re doing to further build our relationship with the SonKim Group Vietnam.
Do you think you have the competitive edge over global players?
I’ve been doing private equity in Asia for 26 years. My experience covers dozens of deals, every major market. In some cases, it is more experience – in years, deals or dollars – than an international fund’s entire team together. At EXS Capital, we have a team of Asian talent with experience from Goldman Sachs, JP Morgan, Morgan Stanley, PwC, Citi and others. We find smart local men and women who have great connectivity locally, good understanding of these markets but also have top international training. So we try to build the best of Asian connectivity and approach, and savvy international sophistication and discipline.
Many PE players in the region are trying to stay away from minority deals as they prefer to be in the driving seat with larger control over operational decisions. Some may do a minority deal only to initiate exposure in a segment. What’s your take on this?
I think the most important thing is not minority or majority, but is there a good partnership? In SonKim Land, investors in excess have bought the majority of the capital, but we still treat the local management like the majority owner. The are the locals, they are the operators and when it comes to those kinds of decisions, without a doubt they know best.
What matter are the questions of ‘Can we add value?’ and ‘Will our capital be welcome?’ A good partnership means both parties are not doing the same thing, because if the are, they will fight. Our local partner should be in charge of origination, local negotiation and operations, while we should advise on capital, strategy and investment. It’s complementary partnership.
How about valuation in the region? How have the returns been for you?
Our returns have been very good. We believe we have generated profits for both investors and the management teams on every deal. Although we don’t have perfect information on the earliest deals, where we were more of an advisors, we believe that everything we have been involved with have produced greater than a 25 per cent IRR for investors. That track record has allowed us to gradually play a greater and greater role and do bigger and bigger deals.
Valuation across Asia is getting higher. In Vietnam, I think valuation is quite high now. So you have to have creativity to get good deals done. When we entered Vietnam in 2012, we got a good deal. Valuation was excellent, but the market was not very healthy. Now the market is healthy but valuation is not as good as it was. But it does not really matter for us in the case of Vietnam because we are putting more money in a partner we already know, blending into a deal where we already have great value. Our local partner has shown a lot of creativity to get good value.
Back the best local partner, give them flexible capital to grow, offer real value add and hold on for the long term. Then you and your investor partners will enjoy the results.