Barings is buying … but who’s selling?

Well-performing Asian private real estate managers must be feeling pretty good these days. There are not many of them and there is decent demand from outside of Asia to buy them.

Adding its name to the hat – or re-affirming a prior appetite – this week was the real estate investment management business of Barings, the investment manager of US insurer MassMutual. PERE revealed how Charles Weeks, the firm’s Europe boss was seeing his role expanded to being head of Europe and Asia. He has a mission to be replicating Barings’ growth in Europe in the east.

Weeks told PERE M&A would be a likely route in Barings’ quest to mirror a European business that now boasts €5.7 billion of assets managed by almost 110 staff across 12 offices, alongside possible “team lift-outs” and organic growth.

This is not the first time Barings, previously known as Cornerstone Real Estate Advisors, has danced with Asian acquisitions. Though it had a meaningful presence in Europe too, MGPA, the private equity real estate firm ultimately acquired by New York asset management titan BlackRock in 2013, was previously a target. Cornerstone made the final round of bidders for the then-approximately $10 billion value-add-opportunistic firm, which had its largest fund series in Asia. That deal was understood to have been struck at significantly more than $100 million.

Few would suggest MGPA was at the peak of its powers when Cornerstone pursued it. Its $3.9 billion regional-record size Asia Fund III had plenty of disgruntled investors at the time, for instance, eventually producing a low single-digit IRR. But such was the dearth of viable platforms in the region, the Connecticut-based manager found itself among 20 suitors at one stage.

According to research by Berkshire Global Advisors, the boutique investment bank at the heart of much private real estate M&A, including MGPA-BlackRock, corporate activity in the market has been on an annual increase since then. It recorded some 13 deals in 2014 and 44 last year. Little of this increasing activity, however, has been in Asia.

Weeks intimated Barings could well seek to mirror the kinds of deals it struck during the post-global financial crisis recovery. His own previous firm, Protego Real Estate Investors, kickstarted Cornerstone’s European expansion in 2010 when it was acquired for around £30 million ($37.4 million; €33.4 million).

Recent European transactions, however, have seen some keen prices paid. These included Fiera Capital, the Canadian investment manager, buying an 80 percent stake in London-based Palmer Capital in a deal worth £40 million, valuing the manager at between 6x and 8x. Palmer’s value-add strategies have produced more than 15 percent per annum net returns since 2010.

Given the lack of options in Asia – and assuming the firm opts for a high-flying outfit over an outfit seeking a ‘corporate solution’ – it would be fair to expect Barings’ acquisition to be a well-performing Asian manager commanding a regional premium valuation and multiple.

Which would fit the bill? SilkRoad Property Partners, the Singapore-headquartered spinout from AEW, possibly. The firm has raised one $445 million pan-regional value-add fund and is in the final throes of its second, for which it already has $377 million in re-ups from an investor pool evidently impressed with what it has seen so far. Hong Kong’s Pamfleet could be another option, the manager eyeing a record third fundraising, having already raised $435 million against a $450 million target. Its prior fund has produced a 19 percent IRR and 1.5x multiple.

Or why not go for Baring Private Equity Asia? Net IRRs of 21 percent against a target of 15-16 percent for its first pan-Asia vehicle has seen investors vault its second fund into the region’s still-limited $1 billion club. Barings could even avoid any branding confusion with such a capture – something Weeks has admitted to having experienced. Admittedly, it would be hard to see Jean Salata’s business – a Barings spin-out itself – jettisoning its real estate arm at this stage. Yet everything has a price.

Whether Barings is willing to pay the premium it and other well-performing Asian managers would likely command, however, is another matter.