CLSA Capital Partners suspended the investment period for its latest real estate fund before a key man provision was triggered.
Chief executive John Pattar’s departure to join KKR, announced on 17 May, would have triggered a ‘key man provision’ stipulated in the documents for CLSA’s latest real estate fund, Fudo Capital III, effectively suspending the investment period for the pan-Asia value-add vehicle.
In a statement to sister publication PERE, CLSA said it had cancelled the investment period before a key man event was officially triggered. A spokesperson said: “The general partner immediately suspended and subsequently terminated [back to the suspension date] the investment period of the fund prior to the actual key person event. Fees were stepped down accordingly.”
Fudo Capital III
Size: $1 billion
Strategy: pan-Asia, pan-asset class
Key persons: John Pattar, chief executive officer; Yeu Liong Ching, chief financial officer; Paul Gately, regional head of asset management; Hirotaka Uchiyama, head of Japan; Byron Zhao and head of China and Taiwan.
CLSA Capital Real Estate’s value-add series has accounted for the lion’s share of the platform’s real estate investment activity. Raised in 2015, Fudo III was its biggest vehicle to date with $1 billion raised from a wide range of investors, including pension funds, sovereign wealth funds, endowments, insurers and asset managers. At the point of Pattar’s departure, approximately $650 million had been deployed and there was about a year left on the investment period. In addition, about 70 percent of the capital had been returned to investors.
But the triggering of the provision – essentially a contractual clause that prohibits the manager from making investments until a replacement has been approved by the investors – would mean it would be challenging for CLSA to continue the fund’s activities beyond managing its existing assets. At press time, it held three properties which, according to one source familiar with the situation, are expected to be exited by the end of year.
Whether CLSA is still the fund’s manager by that point remains to be seen with its investors, including the Teacher Retirement System of Texas, its biggest investor with a commitment of $200 million, Texas Permanent School Fund, University of Michigan, Hong Kong’s de facto central bank Hong Kong Monetary Authority and advisory and investment firm Townsend Group, expected to decide a course of action this summer. While they might vote for CLSA to retain the management of the fund through to the exits of its final assets, they could also vote for a change in manager.
The official positions:
“KKR and John are focused on supporting the objectives of the CLSA investors in any way that they would like us to in the stewardship of the few remaining assets in their fund. These relationships are our priority. We have communicated this message to everyone involved.”
“The Fudo team, including all senior management, are committed to staying with the fund, at CLSA, to effect the original asset management and exit plans for the remaining assets.”
Whatever the outcome, such was the importance of Pattar to the series, it would be challenging for CLSA to find a replacement key man to be approved by the investors and that would throw into doubt any future capital raises for the Fudo series, which has attracted $2.25 billion since the first fund was raised in 2005. That vehicle attracted $430 million, while Fudo Capital II collected $815 million four years later. According to previous PERE coverage, the two earlier funds were generating a gross IRR of more than 30 percent.
One source familiar with the matter told PERE: “I don’t think its unpredictable that CLSA is trying to figure out if there’s anything they can do to preserve their franchise. They don’t have anyone to run it.”
CLSA has been aware of the importance of Pattar’s leadership for some time and in 2014, PERE reported how the firm had altered the key man provision for the Fudo series ahead of the third fund’s final closing. From a single provision stipulating an event would be triggered in the event of his departure, for that fund four more key persons were identified, including chief financial officer Yeu Liong Ching, regional head of asset management Paul Gately, head of Japan Hirotaka Uchiyama and head of China and Taiwan Byron Zhao. However, the provision stipulated if either Pattar, or two of the other four executives departed, it would be triggered.
The result of the investor decision may also have an impact on the futures of CLSA’s other key persons as well as the platform’s 20-plus other staff, some of whom, it is thought, might follow Pattar to KKR. KKR is believed to have contacted Fudo III’s investors to offer assistance working through the asset management of the final assets and that could facilitate the hiring of staff familiar with them. Should any recruitment happen, it would take place after 1 August when Pattar’s non-compete period expires.
In a possible indicator that CLSA, which was acquired by China’s CITIC Securities in 2011, still has plans to run a real estate business, at least in the short term, the firm’s spokesperson said: “The Fudo team, including all senior management, are committed to staying with the fund, at CLSA, to effect the original asset management and exit plans for the remaining assets.” In addition to the Fudo series, CLSA launched a core venture with Tokyo-based property firm Mitsubishi Estate last year. The venture was capitalised with an initial $300 million and there were plans to grow its equity to $1 billion and hire a dedicated team but CLSA declined comment on the implications for that.
Meanwhile, it is thought that about 80 percent of the investors by capital committed in Fudo III are also investors with KKR, including Texas Teachers, which backs the New York firm across multiple other asset classes in addition to its real estate strategies.
KKR also issued a statement to PERE in which the firm said: “KKR and John are focused on supporting the objectives of the CLSA investors in any way that they would like us to in the stewardship of the few remaining assets in their fund. These relationships are our priority. We have communicated this message to everyone involved.”
Looking ahead, it is expected that KKR will introduce its own Asia property fund series, with certain sources suggesting this could happen either later this year or early in 2019. The firm entered the real estate sector in 2011 and has since grown to manage more than $13 billion in real assets commitments as of September 2017. But while it has raised and deployed capital for funds in the US and Europe – the firm closed on its second Americas fund on $2 billion in January – it has yet to complete a successful fundraising for real estate in Asia.