Asia’s Developer of Developers: The EXS Capital Group
Eric Solberg, Chairman and CEO of the EXS Capital Group talks to The-Yield about their unique business model and a future in the cloud.
EXS are a specialist private equity investor into real estate businesses and platforms across Asia. Our unofficial tagline is “Asia’s Developer of Developers.” We have been around for 12 years and we are now fully licensed in Hong Kong, the Cayman Islands and Singapore.
We are differentiated from investment firms in three key ways:
Firstly, most of our investor brethren go directly into assets whereas we prefer to go into platforms. Real estate really is a local business, and we find it difficult to believe that even large firms can compete with smart, connected locals, be they based in Saigon, Tokyo etc. We try and find very expert locals or specialised management teams, and then back them at the holding company level. We want full alignment of interests with shareholder agreements and investor protections, using sophisticated instruments such as redeemable convertible loans. The platforms then go into the assets, so ultimately we have exposure and security to those as well.
Secondly, we tend to invest platform-by-platform in permanent or long-term capital vehicles, not in traditional closed-end, blind pool funds. Closed end funds in volatile markets have been a little bit of a disaster; the real survival rate of Asian closed-end PE or RE fund managers is actually very low. This approach of longer term and permanent capital is much more amenable to building these companies step by step and getting them to scale. It also provides us with the ability to survive and thrive these black swan events, such as COVID and the GFC. You need to be building structures that expect to deal with the periodic crises that Asia has to offer; longer term structures that can take advantage of Asia’s volatility. We design these platforms to allow us to come in over multiple stages over a period of time. Simplistically, we put in a manageable amount of money and make sure it works. Then a bit more, even if it’s a higher valuation as risk decreases, which the management loves as it lessens the dilution. Traditional investors find it very difficult to come in on a project in multiple stages, and therefore never really have the capital or the time to get to scale, which you need to achieve higher valuations.
Thirdly, this platform approach gives us many and better exit or realization options, including listing the whole platform as an IPO or REIT, selling as a portfolio or to a strategic. Especially as we reach scale, the whole is often worth far greater than the sum of its parts, consistently delivering IRRs for our investors in excess of 25%. Asset investing will rarely give you this level of upside.
This three pronged approach has been tried and tested across China, Japan and Vietnam with great success over 15 years. We are now looking to apply it with more sophisticated “OpCo/ PropCo” platforms such as co-working, hostels, etc.
A great example of this differentiated approach is our “Project Lemongrass” investment into SonKim Land deal in Vietnam. Since investing during the Vietnam crises in 2013, SKL has grown from 20 people to 240 people, US$26m of NAV to US$400-500m and they are now a powerhouse in luxury residential and grade A office in HCMC. Our investors are collectively tracking above a 3x with a hope for listing over the next couple of years.
Because of our way of doing things, unlike traditional PE firms, we do not have a large legacy asset portfolio that is openly exposed to the market. We believe key to taking advantage of a good crises is not to be in crisis yourself, and to have the bandwidth to go after opportunities that are now rising due to COVID-19.
We think one of the best of these opportunities lie in data centres. The amount of bandwidth needed right now is enormous and it is difficult to even conceptualise the future needs. There will be a huge increase in demand for fast, reliable internet. Everyone talks about “the cloud”, but the reality is that datacentres is where the cloud lives
Stratus Data Centres is a DC property development and investment platform, in partnership with an expert management team lead by Nigel Clarkson, Our tenants are some of the very largest “hyperscale” cloud providers. With a pipeline of US$1 billion of proprietary deals, we raising an initial round of around USD$2-300 million in accordance with our strategy of multiple stage investment in a quasi-permanent capital vehicle. Again, our ultimate goal is to list this portfolio as a REIT on the Singapore exchange.
On the other end of the spectrum there is stuff that is especially hard hit by the crises, and where one can get some fantastic valuations then enjoy a likely bounce back. Another platform of ours is Project Voyager, which is a consolidation of the leading backpacking hostel businesses across Asia. Most hostels have been utterly shutdown but we think longer term and that there will be a demographic that will really want to leave the house after this pandemic! We do have concerns as to how long it will be before backpackers return, the end of social distancing and the return of lively bars… but they will come back. We are putting together similar things in co-living and co-working spaces.
Due to our unique focus, one of the frustrating things is that the ones that get strategy are often other GPs. As a smaller firm, we have tried to develop independent relationships with LPs with good luck with Asian family offices. Looking to the future, we hope to reach out to Europe and North America to talk about our differentiated approach. It can be challenging to explain to these Western investors that the closed-end, blind-pool private equity structures that have served them so well in Europe and North America actually tend to fall apart in Asia, whereas our platforms go from strength to strength, surviving and thriving through the inevitable volatility which defines Asia.