ASIA NEWS ANALYSIS: Fortress building

New York-based Fortress has impressed the real estate investment community by raising $800 million for its first Asia fund, but will it be so successful deploying the capital? PERE Magazine July/August 2010 issue

The resignation of Yukio Hatoyama as Japan’s prime minister early last month, after just eight months at the helm, served to underline one very important expectation amongst the country’s people: when you say you will deliver something, you must do just that.

Having brought the Democratic Party to power following 54 years of Liberal Democratic Party rule, Hatoyama stepped down after failing to fulfil his party’s election pledge to remove a controversial US military base in Okinawa.

New York-based Fortress Investment Group will certainly have more time to deliver on its latest pledge compared to Nippon’s former premier, having just performed its own impressive feat – raising more than $800 million for its first real estate fund in Asia.
While it has no military compound symbolic of the post World War II peace treaty between the US and Japan to contend with, the firm has raised a lot of capital on the back of a pledge to invest in a sector, market sources say, is hardly providing opportunities on a plate.

Led by Tom Pulley, former head of Japan at DLJ Real Estate Capital Partners, Fortress is an early mover among a steadily increasing number of other firms hoping to invest in Japan’s distressed real estate debt sector. Secured Capital Japan and Apollo Global Management, for example, are looking to compete for deals in this part of the market too.

Fortress’s equity haul for its Fortress Japan Opportunity Domestic Fund, in a country where a domestic track-record and a seriously large and long-standing contacts network is generally considered a must in order to attract capital, is unquestionably impressive – more so when you consider the majority of LPs are Japanese.

Given how few funds held closings in Asia in 2009 – PERE recorded under $5 billion of closings, of which approximately $1 billion were for Japan, it seems on the surface almost unfathomable that even a firm with a reputation like Fortress’ could pitch up in Japan and within 12 months raise ¥80 billion (€729 million; $871 million). Furthermore, PERE understands that a typical domestic commitment to the fund was about ¥1.4 billion, meaning there could be more than 50 LPs in the vehicle – a large number of investors for Fortress to convince into parting with their capital.

However, despite the deserved aplomb for raising the capital, some rival firms argue Fortress could find it far trickier to invest its capital than it did attracting it. One Japanese general partner suggested Japanese banks have become far more partisan in terms of who they will work with when addressing their loan books than they were pre-global economic downturn. Referencing Fortress, the GP in question said: “They might have been able to raise the capital, but the next step is to deploy it, and if you don’t have the connections from the banks primarily, you aren’t going to put that money out.”

Others counter such scepticism. One private equity real estate advisor declared Pulley and his number two, managing director Eric Golden, are leading a platform perfectly placed to capitalise on the opportunity ahead.

“I do not think domestic relationships will be a problem,” he said. “They also have neither legacy assets nor large overheads to feed and have not burned any lenders in this cycle, which will hold them in good stead as sponsor quality is going to be a major factor going forward for lenders, even on non-recourse deals.”

Fortress’ early forays already bode well. The firm has already invested equity from the new vehicle, capturing 1,200 home loans from Lehman Brothers, last August.

Its investors will want to see similar opportunistic plays, and even though giant Wall Street bank collapses don’t happen every day, the omens are looking good when you consider Fortress’ close ties with Nomura. The Japanese financial conglomerate, which has a vested interest in Fortress, having bought 15 percent of its stock when it floated in 2006, was heavily involved in fundraising for the vehicle, and its well established network is expected to yield entries to deals too.

All things considered, Fortress stands a much better chance of delivering on its pledges and therefore surviving far longer than the Democratic Party of Japan’s first prime minister for more than 50 years.