October 21, 2013
Interviewed by: David Snow
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Raising a First-Time Chinese RE Fund

Jeff Tucker of Beijing- and Dallas-based investment firm Century Bridge Capital shares lessons and insights from his firm’s first-time Chinese real estate investment fundraising effort.

Jeff Tucker of Beijing- and Dallas-based investment firm Century Bridge Capital shares lessons and insights from his firm’s first-time Chinese real estate investment fundraising effort.

Raising a First-Time Chinese RE Fund

With Jeffrey Tucker of Century Bridge Capital

David Snow, Privcap:

Jeff Tucker of Century Bridge Capital, based in Beijing, China, joins us today.  Jeff, welcome to the program today. Thanks for being here.

Jeff Tucker, Century Bridge Capital:

Thanks for having me.

Snow: I’m interested in learning about the fundraising market.  Your firm, Century Bridge Capital, raised a first-time fund targeting the Chinese residential real estate opportunity. You closed about a year ago.  Among your duties as the COO of the firm is IR and fundraising, so you’re heavily involved in that.

Let’s talk about what that experience was like and I’m sure our viewers are going to be very interested in what the experience was like.  Where did you find pockets of interest in Chinese real estate in particular and where were these investors from?

Tucker: The investors for Chinese real estate fund, the LPs, are largely the same types that you would find in a similar US domestic or European real estate fund; The pension funds, the endowment funds, the foundations, funds of funds, family offices. The types of investors are generally identical.

Within that, you have many investors who are more or less sophisticated or knowledgeable about Asia or China, so one of the real challenges is knowing where to spend your time.  You know that you’re going to go through an education process and I think we, as a GP operating in China, consider that one of our primary responsibilities: to be a facilitator of knowledge, taking what we see on the ground and bringing that to the investment community.

Having said that, you don’t want to burn up a lot of time and energy on groups that either don’t have the allocation for China, or they’re not so inclined, or maybe they’re too early on the learning curve to really make a decision as you’re raising a fund.  You see it across the whole spectrum.

Snow: Can you tell me about what you learned about the LP appetite for China in general, and China’s real estate in particular, as you were, as you say, educating a lot of these groups?

Tucker: I think the appetite’s definitely growing and it increases every year.  You know, China is, in the eyes of many LPs, too large to ignore, particularly after the global financial crash a few years ago.  They’re looking for interesting opportunities in the emerging markets, so there’s a lot of growing appetite for it and desire for it.

That’s often times countered with fear and uncertainty about China.  There are a lot of things in the press about China that affect people’s sentiment about it.  It is a completely different market and I’d say this about all the emerging markets: you can get a false sense of comfort by investing in an area that’s familiar to you, and going somewhere else, to a new geography, a new country with a different system, can be unsettling.

What we’ve seen though, is that a combination of the various consultants involved in the real estate industry, as well as the limited partners, we’re seeing them really come up to speed, particularly in the last couple of years.  I can think of one large state pension fund and one of the people on their team covering Asia, has travelled to twenty five tier two cities in China.

So there are large investment groups who are dedicating tremendous resources to understanding the market and to selecting managers in China.  I’d also note that many of the consultants have also established a physical presence in Asia.  So all of those are positive indicators that LPs understand the market much more over here.

Snow: You mentioned trying not to burn through too much energy on educating some groups that perhaps were not as far along the learning curve as others.  What were some of the questions that you would get again and again in those kinds of meetings where it was clear that maybe there was just much more education needed?

Tucker: Is there a real estate bubble in China?  Can I get my money out?  Can the government just change the rules on you at any time?  Those are some of the things that come up and they come up repeatedly. It makes it hard from a GP standpoint to win the day and answer those questions effectively when, you know, there’s a sort of constant stream of negative press about China.

We ultimately decided that you couldn’t fight the tidal wave of the press. We decided to take it sort of investor by investor and really try to understand their concerns and spend a lot of time explaining the answers. There’s often great disparity between reality and perception, and I think that’s definitely the case with China.

We were fortunate that there were quite a few investors that spent time with us in China. I think that’s one of the most important things to really convince them of the opportunity. It’s getting them to China.  We have one investor who after we’d raised the fund, did a debrief with them and they said, “You know what? We really liked you guys when we had the first meeting with you, but then we walked away and said there’s no way we can do a first time fund in China residential real estate – the headline risk is too great; we can’t do that.”

I said, “Well, what ultimately got you over the hook? and they said, “Coming to see your team and coming to see your tier two city and coming to see developments in tier two cities.” That was when they understood what was really happening on the ground in China.

Snow: There is very – at least relative to the opportunity to invest in residential real estate in China – not a ton of foreign capital going into those kinds of assets.  Is it your sense that there’s any capital earmarked at all in Western institutional investors for Chinese real estate, or is it not even near there yet?  Is it very opportunistic at this point?

Will it get to a place where there will be a chunk of their portfolio that says “Real Estate in China?”

Tucker: I hope so. Right now, we’ve probably fallen into several different categories, depending upon the limited partner.  We could just be pure opportunistic, we could fall into the real estate category, we could fall into the international category, we could fall into all three.  It really depends. Of course, many of them have no allocation for it and like I said, we’ve got to be very mindful of who we spend time with and whether or not they’re going to get there in a timeframe that works for us and our fundraise.

Snow: Outside of the US, where did your fundraising travels take you, and what was most successful?

Tucker: I assume it’s the same for almost any emerging markets fund – but for us in China, it was a global fundraise.  We had meetings with the institutions in fourteen countries and with several hundred investors. It was very broad.  In the end, most of our capital came from Europe. Having said that though, we have a very healthy representation from the US and Asia, so all three continents are represented.

It sometimes gets hard to categorize. For example, several of our investors are US or European-based, but they’ve got offices and an investment team in Hong Kong or Singapore and those are generally the teams with which we’re engaging.

Snow: What do you think, ultimately, was responsible for your being able to finally wrap up the fundraise and call it a close?  Was there a tipping point in LPs communicating with each other?

Tucker: There’s always safety in numbers and I think that as we — it’s sort of like dominoes falling and you want to get one and two and three, and each one gets successively a little bit easier. I think once we hit critical mass of a little over $100 million raised, we were able to get the rest of the way.  We ultimately raised 170 million.

I think we did a lot of educational work with a lot of LPs, who decided not to invest this time. Some were restricted from investing in first-time funds and so I think they wanted to see how we’d do in this fund.  Hopefully, over time that pays a dividend, that we’ve educated an investor that may not have invested with us right now, but we know them now and they’re watching our progress.

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