EXS believes niche knowledge and the ability to pick reliable local partners are the keys to success
EXS Capital’s unique approach to Asian real estate is paying off, with recent deals showing a significant expansion in scale.
The independent investment company is set to raise US$50m-100m of new equity this year for investment in Vietnam and has also received a US$200m equity commitment for a data centre strategy – the company’s largest so far.
Founder and chairman Eric Solberg, who has been working in private equity and real estate in Asia since 1991, eschews the traditional private equity model for Asian real estate. Instead the company raises equity on a deal-by-deal basis for platform-level investments.
Solberg says: “The closed-ended fund model in Asia has not been a successful or sustainable model, with a few exceptions. We did a study three years ago looking at how many Asian private equity firms made it to their third fund and the answer was a tiny handful out of a total universe of several hundred.
“The trouble with Asia is increased volatility, which means timing becomes more important than any other factor and throws the ‘raise capital, invest capital, recoup capital’ bandwagon off the road.”
The volatility of Asian markets is not the only problem; Solberg believes the private equity fund model itself is flawed.
“Fund managers have to deal with a fund- raising cycle as well as the market cycle. The three laws of closed-ended funds in Asia are: you can only raise money when markets are going up; you are under a lot of pressure to invest, possibly at the top of the market; and you don’t survive unless you can raise your next fund.
“So, managers begin to raise their next fund not when the returns are in for the previous fund, but when they have finished investing the previous fund. Then you need to sell investments to crystallise returns and show investors some track record. Which do you sell? Those you can, which are likely to be your best investments.
Incentives to sell investments too early
“Therefore the model creates a strong incentive for managers to sell their best investments too early and also, as they say, to let the dogs die last.”
The EXS Capital model allows investors to back a particular strategy and to stick with it for the long term, but also to match the structure and instruments it invests with to each particular situation.
The company itself does not specialise in any market or sector, but rather the team’s skills lie in identifying opportunities and management teams and getting the most out of them.
Each transaction stands on its own merits; EXS cannot hide a bad deal among the good, but Solberg says every transaction so far has made money for the company, its investors and the teams it has backed.
EXS, which Solberg launched in 2007 after working with CVCI, where he was a partner and head of Japan, looks broadly for two types of opportunity.
The first is to exploit temporary distress, as in the case of the Vietnamese real estate market. The second is to exploit underdeveloped market niches. In both cases, the company seeks experienced management teams to back.
Solberg says: “We believe real estate is a local and specialised game. You have to go in with a local expert with political and banking connections and expertise in a local market. The alternative is a specialised niche, where knowledge of the niche trumps local real estate knowledge.”
Solberg comes from a private equity rather than a real estate background, saying: “There are a lot of hard asset real estate platforms and funds. They are real estate specialists, whereas I come from a private equity background; my skills are in evaluating management teams, brands and organisations.
“I don’t want to have a joint-venture agreement on a property, I want a shareholders’ agreement with my partners.”
EXS began with advisory deals, then started raising capital for smaller asset management transactions.
A relationship with Vietnamese developer Son Kim Land (see panel below left) really helped EXS to take off. After raising US$37m for Son Kim in 2013 and a further US$46m this year, EXS hopes to raise US$50m-100m this year. The medium-term goal is an initial public offering for Son Kim.
The company’s latest deal is in the data centre sector, where it has partnered with a management team to create a business called Stratus.
A global private equity firm has made an investment commitment of US$200m to a pan-Asia and European data centre strategy. A first asset has been acquired in Amsterdam.
Solberg says: “We have a very experienced expert management team that we’ve partnered with to create a platform called Stratus. We are not the operators of these data centres, but our goal is to be the landlord of choice. Data centre operators are not short of money but they may not want to tie their capital up in real estate.
Creating an ‘operator neutral’ landlord
“Data centre REITs such as Keppel DC REIT are both owners of data centres and operators, but some major operators don’t want to rent space from a competitor. We have created an ‘operator-neutral’ data centre landlord.
“It is quite likely we’ll run through this original $200m quite quickly and will then be back in the market looking for a further US$200m-300m. The goal is to build the platform to something we can IPO in a few years time.”
Looking ahead, the company is talking to a co-working space operator; Solberg believes the best approach to co-working is one where the business both owns and operates the real estate, which allows it to keep all the upside from the business and also offers an opportunity for external capital to help expand the business.
Malaysia is a market that is suffering from a fair amount of distress at the moment and Solberg believes there are mispricing opportunities there. He is sanguine about which real estate sector to target, saying EXS wants to find a partner such as Son Kim Land, which can invest across all sectors.
The EXS team is small, comprising only seven people, but is working on increasingly large transactions and Solberg says he hopes they can work on two or three deals each year in future.
An obvious question is: if the real estate private equity model is so wrong for Asia, why do more firms not work in the same way as EXS?
Solberg answers: “I know exactly why people don’t do what I do. Because I have had to invest so much of my own money and time to build up a track record that enables me to go out and do US$100m deals.”
EXS Capital’s investment in Vietnamese developer Son Kim Land has been transformative for both companies.
The investor saw Vietnam in 2010-11 as a market in temporary distress, but with strong demographics and a bright longer- term future.
Eric Solberg, chairman and chief executive of EXS, says: “We interviewed 27 Vietnamese developers, carried out serious due diligence on six and ended up choosing Son Kim.”
Son Kim is a family-run developer that had a reputation for high-quality projects and for being a reliable partner.
Solberg says: “We brought capital but also expertise; introducing them to partners, bringing in other investors and also making a stand for transparency and governance – something international investors will see as signs of a trusted partner.
“We estimate that they’re the 10th largest real estate developer in Vietnam and we want to get them into the top five. We want to build a classic Asian developer with residential development profits and long- term rental income.”
EXS has raised a total of US$83m in two tranches from Asian investors, which has been invested via a convertible loan structure to offer downside protection. Returns are expected to be in excess of 25%, Solberg says.
Solberg sits on the Son Kim board and EXS will own a 5% stake in the company by the time it lists.
EXS founder is Asia markets veteran
EXS Capital founder, chairman and chief executive Eric Solberg started his career with Wasserstein Perella & Co in New York and moved to Asia in 1991 to work for Peregrine, where he became head of India.
He founded private advisory group SCG in 1995, raising capital for a series of internet companies, most of which perished in the 2001 dotcom crash. Solberg then worked for CVCI until founding EXS Capital in 2007.
At CVCI he became a managing director and partner, as well as head of Japan.
August 14, 2017
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