Grant Kelley is the firm's Asia CEO.
Is the subprime situation affecting your ability to close financing for deals?
Grant Kelley: IÆd say the first observable gasp of relief was the rate cut in the third week of August. It was incredibly favourably received by lenders everywhere and we could close the deals we had on the books at the time.
In a more general sense, I believe the situation is going to restore the criticality of relationships in the business. In the past, there was so much liquidity in the system that the business was in danger of becoming commoditised.
The importance of well-known sponsors, who bankers are familiar with, is coming back. Sponsors with track records, who have been around for the long haul, will continue to find financing.
What was your most recent deal announcement?
In August, we announced an investment in Challenger Financial Services, an Australia-based investor in real estate and infrastructure. We will invest $400 million via a convertible bond û it was a tortuous structure but ultimately one we are pretty happy with. We are raising leverage at a ratio of about 60% on an overall basis and the syndication is by a Credit Suisse-led consortium.
What is your comment on the opportunity in Australia?
In Australia we saw the market go from nothing to announced deals of $20 billion plus with no intervening step. It was a micro market until 2005 and then exploded in 2006. There is a delta in Australia between announced and completed deals.
We took our time in Australia and looked at multiple deals û we looked for an asset with a strong management team, real estate focus. We wanted to do it on a proprietary basis. The asset was not in play û we did it negotiated.
What do you see as key ingredients for success for private equity in todayÆs environment?
I find reputational capital in the industry is very important. One source of that is fund-raising. We also find it helps with deal sourcing. As private equity becomes more institutionalised, which is happening around the world, it is imperative for players such as us to create win-wins.
The real art in this industry, it is almost an instinct, is sourcing. Our view is you find maybe a couple of really interesting deals a year, which are scaleable with a $500 million-$1 billion enterprise value - and those are the ones you have to attack.
You need a combination of analytics plus street instinct, which encompasses relationship management to informal networking. ItÆs important to stay focused on what you want to do, why you are investing and what you bring to the table.
We are not momentum investors. Someone once told me our deals are esoteric and I think that is a compliment. We base ourselves obviously on returns but also on creativity.
Is your approach to private equity financial engineering or value enhancement driven?
With Raffles we believe we have enhanced value dramatically. This comes from a number of components. Revenue enhancement. Cost reduction. Fresh marketing programmes. We realised very quickly that the hotel business was trending towards scale and thus the consolidation of Raffles into Fairmont created a great deal of value. It enhanced scale thus reduced costs and generated distribution channels coming into Asia from North America and Europe where Fairmont was very strong.
Our investment of $737 million in Fukuoka in Japan is the same story. We repositioned the assets towards a younger, more affluent consumer, restructured them and brought in new investors.
The days of private equity funds developing new ways of investing principally using hedge-fund type approaches on the financial engineering side are over. A plethora of derivative products have altered how we acquire assets, evidenced by the Challenger investment. We believe the easy wins are behind us as there is too much liquidity in the system.
What are your fund and deal parameters?
We raise close ended funds which we aim to deploy in 2-3 years and return capital in five to eight years. We are helped by the fact that real estate offers the opportunity to make partial exits along the way. We are currently raising our eighth fund. We invest $250 million-$500 million of equity in a deal.
Often our smoothest exits are with investors with a lower cost of capital and/or a longer forecast horizon than us. ThatÆs often a more predictable and smoother exit than an IPO.
What are your focus areas?
We have a broad definition of asset value but as an investment theme we like to see hard assets at the core of a deal because we believe it caps your downside. Our experience has been that in Asia property is the asset class which has been the most durable and least volatile.
Our deals tend to be highly geared due to the real estate component. We raise about 60% of net asset value by way of debt.
Around 20% of our Asia invested capital is in NPLs. We see this as a spasmodic business when markets correct. Asia NPLs was primarily three markets for us: Japan, Korea and Taiwan. We are probably best known for our Korea investments. NPLs are a true area of opportunistic investment but are incredibly finite. It is a self liquidating business.
What are your hotspots for investing in Asia?
In Japan and Australia our sense is there are still mispricings of corporate assets and opportunities still exist. Corporate balance sheets provide opportunities for carve outs as sum of the parts valuations can create value. The art is obviously in finding these opportunities.
As deals become bigger control becomes more difficult. Either you form a consortium or you take a minority position, governance rights and a management team you are comfortable with. This can be illustrated with respect to China û the market is not about finding buyouts but about finding partners.
In India we continue to look for opportunities to bring our resources and expertise to bear in an attractive market, but one which has no shortage of liquidity and thus is a challenge for investors.