Sir John Beckwith’s company is raising three funds, the latest being an indirect vehicle whose liquidity should appeal to defined contribution pension fund investors, reports Jane Roberts
Fund raising started in earnest last month for Pacific Real Estate Capital Partners’ daily-priced fund, which will invest in UK and overseas property via the capital markets. Called Pacific’s Liquid Property Fund, it is the most innovative of three offerings that Pacific Investment’s real estate team is now raising funds for.
The fund has been some time in the gestation; it was originally slated for launch last October. This is not least because as an open-ended investment company UCITS III structure, it has had to clear strict regulatory hurdles with the FSA. This process was completed in April and fund manager Steven Grahame confirms: “We are expecting to go live in June or July.”
The in-house fund-raising team is talking to pension funds, their consultants and other professional – but not retail – investors. PRECP hopes that the product’s liquidity, and diversified property exposure, should make it particularly appealing to defined contribution pension schemes, which generally have a greater requirement for liquidity than other pension funds, though it obviously hopes investors will keep their money in the fund for the longer term.
The fund’s investment strategy is to capture the property market’s beta return and maintain a stable, diversified level of income without buying any direct property. Instead, the fund’s ungeared capital will be tactically allocated to liquid property instruments and securities, which are faster and easier to trade than direct property.
Grahame and deputy fund manager Toby Hayes will invest in structured property debt, and property and equities derivatives, making decisions on allocations between one market and another based on relative risk premiums.
A different proposition
The product differs in several respects from the Iceberg hedge fund managed by Reech Alternative Investment Management and CB Richard Ellis, which also invests across liquid, capital market strategies. For one, Iceberg is a geared, absolute return fund, while Pacific’s Liquid Property Fund is ungeared and “benchmark aware”, by which PRECP means focused primarily on, but not tied to, the performance of the UK Monthly IPD index. Liquid Property Fund’s target is to preserve capital and to distribute an income yield of at least 4-5%.
Previously, Hayes says, investors looking for property exposure without the illiquidity and high costs of traditional bricks-and- mortar funds, “only had the REIT route. The advent of IPD swaps opened that up. Investors in our fund can see the prices we are buying at and can receive a daily performance and risk report.”
Grahame argues: “When you buy an IPD exposure via a derivative, you are accepting the risk of buying the property market. But the risk around individual tenancies and building fabric costs are neutralised by the diversification provided by the broader IPD universe of underlying assets. One benefit of our approach is that we receive a property-like return with more certainty of stable income and greater diversity.”
The fund is set up to trade swaps as well as futures and is fully compliant with governing body the International Swaps and Derivatives Association (ISDA), giving it the flexibility to trade the whole gamut of products, terms, sectors and sub-sectors, including non-UK indices, such as NACREIF in the US, as and when such trades make financial sense.
Exposure to equities will be mainly through indices, such as EPRA’s, although Grahame says he has “a couple of strategies that are not public yet”. He adds that he “incubated” the investment philosophy and created the model when he worked in real estate alternatives at Hermes between 2009 and 2010, before joining Pacific.
He won’t comment on Hermes’ property capital markets strategy, but market sources say Hermes made big investments in CMBS during this period, advised by Burfield Capital Partners, and these investments were all sold at a profit within a year. Hayes agrees that it is hard to buy UK CMBS at the moment. But there is more liquidity in the US, where the fund also expects to invest.
Although the fund will always have “a UK home bias”, the consensus forecasts for UK property are that returns are plateauing. Therefore Pacific’s Liquid Property Fund is likely to look for a degree of relative value in the US, which is trailing behind the UK. The wider PRECP team is led by Gerald Parkes, former head of Lehman Brothers’ private equity real estate arm. He teamed up with Pacific Investment’s founder and major shareholder Sir John Beckwith a year or so after Lehman Brothers crashed.
Beckwith is well known in property and investment management circles, having backed several businesses. However, as Pacific’s Liquid Property Fund is a new concept, PRECP is taking a ‘belt and braces’ approach. One of the regulatory requirements of a UCITs fund is to get independent pricing for its investments and PRECP has appointed JP Morgan Europe as fund administrator. The bank will do all the price checking and the daily valuation.
Liquid Property’s “extra resource”
This will not come cheap, but, according to Grahame, it will be an important extra resource “that shows we’ve done all we possibly could to meet investors’ demands”. PRECP’s other two funds are the Absolute Return Fund, which Parkes is managing, and the Euro Activ Income Fund.
Absolute Return plans to buy UK assets that can produce attractive returns through asset management, without reliance on market recovery. Its target investments will be direct real estate and possibly preferred equity or mezzanine finance, where the investment would give the fund control over the underlying asset.
The European fund, by contrast, will have a core strategy, producing sustainable income with low leverage and is designed to be open-ended. Its manager, Simon Foxley, used to be the fund manager for UBS Global Asset Management’s Euro Value Added Fund and Euro Core Fund. His initial focus, once PRECP has raised some capital, will be France and Germany.
As is the way with start-ups, several of PRECP’s senior managers have a shared history: Hayes and Grahame also worked at UBS Global Asset Management, as did PRECP head of transactions Jeff O’Dwyer and acquisitions director James Wakelin. But despite the wealth of experience at Pacific, a proposal to float PRECP in 2009, advised by Oriel Securities, didn’t take off.
The long-term performance figures for Pacific’s Liquid Property in the fund’s model are impressive, and Grahame says the concept has generated “a lot of interest”. How much? “I’d be happy if we get £500m in the next 12-18 months,” he says.
Beckwith’s push gets range of start-ups moving
Sir John Beckwith’s Pacific Investments has backed a string of investment management start-ups in the years since he quit the public company arena after successfully selling London & Edinburgh Trust with his brother Peter. He founded Pacific in 1993 with CEO Mark Johnson. He is known for keeping a tight control on costs and linking pay closely to results. Before he formed Pacific Real Estate Capital Partners, Beckwith’s real estate fund management ventures included Alpha Real Capital, a global value-added manager led by Philip Rose.
Alpha failed to launch a £400m UK opportunity fund in 2009 but manages others and this year it bought Close Brothers’ property funds business for a nominal sum, which has around €550m of assets under management. Pacific reduced its holding to a nominal interest in two transactions in 2009 and 2010. Beckwith also founded Europa Capital with Charles Graham in 1999 but is no longer an investor. Pacific Investments recently launched an absolute return fund business with the backing of a company owned by ICAP’s Michael Spencer.
Pacific also owns traditional asset manager River and Mercantile, having sold two other such stand-alone businesses, which managed assets across a range of asset classes: Thames River Capital and Liontrust Asset Management. Thames River, whose assets under management included £840m of mainly property securities in five funds, was sold last year to F&C Asset Management for up to £53.6m in cash, representing a 72% internal rate of return