Private equity investments work differently in China, and the Carlyle Group is preparing to spin off its China real estate unit into a separate entity to fit the requirements of the mainland market, according to sources familiar with the company’s plans who spoke with Mingtiandi.
The China unit, “which may or may not” include direct involvement by the US parent, is being set up to conform with a desire by pension funds and other investors who might typically invest in blind funds for executing deals in the US or other global markets, to get more directly involved in the details of operating companies in the largest real estate market in Asia, the sources said.
The spin-off is planned to be finalised at the end of 2018.
Getting the Freedom to Invest Directly
“In China the large LPs prefer to do direct deals, and in Asia the trend is toward large LPs having a bigger team on the ground,” a source told Mingtiandi, with regard to the institutional investors who typically invest as limited partners in private equity funds. Institutions such as Canada’s CPPIB are now teaming directly with developers in China to take advantage of real estate opportunities, and Carlyle’s competitors at Warburg Pincus have already been involved in co-founding a number of real estate ventures on the mainland.
The decision to spin off the China real estate unit, Carlyle China Realty, was first revealed by the company’s US leadership this week.
“We discovered a nuance when it comes to investors and traditional funds in the Chinese market,” the company’s deputy chief investment officer Brooke Coburn told Bloomberg in an interview. “Investors want to be more prescriptive on terms including the timing of the exit or pursue either smaller transactions or deals that require shared control.”
Letting a Successful Business Go Solo
While Bloomberg termed the move a retreat, investors familiar with Carlyle’s track record on China deals credited the private equity firm with achieving positive results in the territory. “They were solely investing in Shanghai until recently,” a veteran real estate lender told Mingtiandi. “We took a look at their past track record – all made money.”
In 2016, China Logistics Property, a Shanghai-based warehouse developer which Carlyle had invested in during 2013 achieved a $460 million Hong Kong IPO. And during that same year, the private equity firm sold Shanghai Central Plaza on the city’s Huangpi Road to China Vanke for $369 million.
Carlyle’s Coburn backed up that favorable evaluation of the China business saying in the Bloomberg interview, “When we have a team or a strategy that has not performed, we get out of that business and turn off the lights, but this is a different scenario.”
According to Bloomberg, once the China unit is spun-off it will continue to be led by current China real estate managing director Han Chen, who has been with the company since 2004 and is based in Shanghai.
The soon-to-be independent unit is expected to take advantage of its new-found autonomy to do more direct investment, and co-investment, with developers and other players in the market. However, the company would also continue to manage existing assets acquired by Carlyle’s real estate operation and through its separate account business, until those assets are sold.
Once the China real estate operation is flying solo, Carlyle’s global operation will make its future real estate investments in the region via its principal buyout strategy.
The change in approach comes after the company’s head of Asia real estate Jason Lee departed in April. Carlyle then scrapped that position and hired two new people to focus on investments in Indonesia and Vietnam. After announcing Lee’s departure, Carlyle said it would focus on investments in logistics and office projects in China.
Carlyle Concentrates on the US and Europe
Although Carlyle has been successful in China, most of the company’s $200 billion in managed assets are concentrated in the US and Europe. The company recently surpassed its target for a US real estate fund, which closed at $5.5 billion.
In its operations in the West, Carlyle follows the traditional private equity “blind pool” approach, where investors entrust a fund manager to make acquisitions from a shared pot of capital and then distribute returns.
With China’s shortage of talent and growing competition for assets, many money managers are becoming more deeply involved in operating businesses, particularly as investors dive more deeply into specialised and more management intensive asset classes.