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Combining local understanding with international standard
A closer look into one of the few Asian-based real estate private equity firms
Darryl Yu 18 Mar 2015
 
Chiaranussati  

Having the eye for the right investment opportunities isn’t always about spot-on timing but also leveraging local connection. That was what Suchad Chiaranussati was hoping to achieve when he set up real estate private equity (PE) firm SC Capital Partners in 2004.


Working in Asia for over 20 years, he noticed a lack of domestically-owned PE firms in the pan-Asian region and saw an opportunity to combine his local connections with the high standards of global fund managers. “I was very determined to set up a platform that could withstand the high due diligence requirements of institutional investors,” Chiaranussati, chairman at SC Capital, notes in an interview with The Asset.


Primarily looking at real-estate developments ranging from office buildings to hotels across Asia, the firm prides itself on discovering opportunistic real estate investments by using its local expertise. Citing the mixture of developed and emerging economies in Asia, Chiaranussati is excited about the number of investment options he gets in the region.


“We have a variety of markets that we could invest in. There will be some markets that exhibit a very attractive investment thesis and we can chase growth in these markets and rotate out of these investments according to the macro development.”


Although there is in-depth research involved, it was the experience and quality of the people in his team that eventually determined the investment choices of the firm’s funds. “Our team has operated in Asia-Pacific for the last 20 plus years, we have a good relationship with the people in the local market. I believe that around 70%-80% of our transactions are due to our own network knowledge.”


In 10 years of operations, the firm raised about US$1.8 billion from institutional investors across its four funds. In December 2014, SC Capital did the final close of its latest and largest Real Estate Capital Partner IV fund (RECAP IV) with a total of US$850 million of total equity commitments ranging from private foundations to public pension funds that include the city of Phoenix in Arizona (US$30 million) and the state of New Jersey (US$100 million) in the US.


Originally targeted to be US$750 million in size, Chiaranussati was pleasantly surprised to see a huge amount of interest for RECAP IV. “We had a bit of a shock because the demand of the fund was really high, almost reaching US$1.4 billion,” he recalls.


The recent fund-raising activity also showcased a significant increase of Asian institutional investors into the fund, which before had predominantly been investors from the US and Europe. According to Chiaranussati, RECAP IV had around 40% from the US, 35% from Europe and 25% from Asia. “If you look over the last few years, the Asian component has been increasingly fairly rapidly. This reflects the growing sophistication and risk appetite of Asian institutional investors as they are beginning to realize that there is a lot of opportunities in private equity in Asia,” he observes.


The unexpected fund size represented a milestone achievement for the firm, which raised only US$221 million for its first fund (RECAP I) in 2004 with just two investors. That fund went on to invest in five major real estate developments that included a luxury residence development in Bangkok and Phuket Square, an upscale retail and resort hotel development. The firm’s investments eventually paid off, generating a healthy IRR of 13.9% and an equity multiple of 1.9x.


Confident in raising his firm’s first fund, Chiaranussati in 2008 flew to the US in search of new investors for his second fund (RECAP II), only to find out that the Dow Jones Index had collapsed and dropped more than 700 points in a day. Initially having a capital-raising target of US$400 million, he managed to get US$190.3 million in investments despite the negative investor sentiment at the time.


“Rather than be discouraged by the turn of events, we persevered through this tough fund-raising period,” he notes. “Eventually, I believe our investment discipline paid off, and investors and potential investors who had seen our Fund I investments bear fruition, put their faith in us a second time around.” Despite the challenging macro environment, SC Capital’s RECAP II was still able to achieve IRR of over 30% for his investors.
With investor confidence slowly returning following the end of the global financial crisis, Chiaranussati looked to expand into new regions under his US$530 million third fund (RECAP III), most notably injecting US$70 million of international capital into Myanmar with 13.2% of RECAP III.


The highlight of SC Capital’s investment in the country was an old British cruise ship named the UK Saga Ruby. With more than 300 cabins, Chiaranussati plans to convert it into a luxury hotel. “What I see in Myanmar is a country similar to Thailand 20 years ago,” he says, adding: “All I see are growth opportunities in the country, given that it can work out its political issues.”


Despite the frontier market approach, many of SC Capital’s investors remain supportive of the firm with one institutional investor saying, “ultimately we’re backing an entrepreneur and this is classically what we should expect from an opportunity fund in Asia. If it goes well, there could be a massive payout.”


Discipline in accessing the risks in investing is key for Chiaranussati when he looks at any new property development. “Some people just want to do the deal so much that they start overlooking the risk and begin to overstate the upside and underestimate the downside,” he notes. “The one reason why we are surviving today is because we have the discipline of realistic underwriting.”


Looking at 2015, he sees only “divergence”. With volatility happening around the pan-Asian region, returns will be harder to find. “If you look at the last several months, the return is not compensating the risk you’ve been facing,” he points out.


Although 2015 will be another year full of challenges, Chiaranussati is optimistic that his new investments will yield positive results. The firm’s RECAP IV fund has started making investments in Australia and just acquired The Rydges Darwin Airport Hotel and Resort from the Denwol Group for around US$80 million

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