US private equity firm Carlyle made headlines again last week when it announced a US$400 million joint investment with the Townsend Group and China warehouse developer Yupei.
According to a report in the Wall Street Journal, Carlyle and Townsend will together be investing US$200 million to acquire warehouses already developed by Yupei and to develop more distribution facilities to supply China’s booming logistics sector.
By investing with the purpose of developing future facilities, the US firms are most likely contributing a smaller portion of the cash at the commencement of the transaction, and would invest additional funds if and when the consortium is able to secure and develop additional warehouses.
The Journal story reports that five existing distribution centres owned by Yupei would be included in the deal, with another 12 facilities to be added in the next two years.
Carlyle has been aggressive in China this year, having purchased a commercial building in Shanghai for US$266 million during April, and shopping malls in Suzhou and Hangzhou during May.
Now venturing into the logistic sector, the private equity giant seems determined to maintain its rapid pace. Given the aggressive time schedule planned for the 12 additional facilities, the apparent structure of the deal and Yupei’s recent history, however, there may be significant obstacles to this latest transaction ever being fully realized.
China’s logistics real estate sector is attracting high levels of interest from international investors this year, with Australia’s Goodman Group and the Canada Pension Plan Investment Board (CPPIB) announcing a US$500 million increase to their Goodman China Logistics Holding partnership in July, and industry heavyweight Global Logistic Properties signing a series of large leasing deals with ecommerce firms and other occupiers.
Yupei and the Foreign Investors
However, this is not the first time that China’s logistics sector in general, or Yupei specifically have been “discovered” by the outside world.
In November 2008 Yupei had already received US$46 million in investment from Sam Zell-led private equity firm Equity International in return for a 49 percent stake in the company. At the time, it was understood by most observers in the industry that Equity International was investing with the intention of helping Yupei go public (and presumably reaping a significant profit).
Speaking of the investment at the time, then CEO of Equity International Gary Garrabrant said, “Equity International has pursued the warehouse and logistics sector based upon powerful fundamentals, namely the explosive growth of consumerism in China.” And further noted that “Yupei is ideally positioned to achieve scale and leadership in this high-growth sector.”
Only three years later, however, Equity International was selling its 49 percent stake in Yupei to Global Logistics Properties for US$53.6 million. The reason for the early exit and disappointing return was Yupei’s struggles in acquiring the new sites necessary to develop profitable logistics developments in China. GLP on the other hand, despite being a foreign company, has been successful in continually acquiring new sites and developing these sites by leveraging the access to capital provided through its status as a subsidiary of the Singapore government’s GIC investment firm.
Coincidentally, Equity International this week announced a second investment into China’s logistics real estate sector when it unveiled a new partnership with the Redwood Group to develop warehouse facilities in China. The current China representative for Redwood also served as the COO of Yupei during the time that it was invested by Equity International.
What Does Carlyle Bring to Yupei that Sam Zell and GLP Didn’t Have?
With Global Logistics Properties (GLP) owning a 49 percent stake in Yupei, and in light of the resources that GLP has available, there is also a question of why Yupei needs Carlyle and Townsend at all. Presumably, if Yupei has access to sites, then GLP would be ideally suited to help exploit these sites through its market contacts, access to capital, and existing government relationships.
While China’s logistics real estate sector has delivered net yields of 8 percent or better for investors over recent years, the nature of this deal and the history of the parties involved suggests that this investment by the Carlyle Asia Real Estate fund, may end up yielding much less than its $400 million headline might imply.