Deal focus: Warburg Pincus returns to ESR

Warburg Pincus completed its exit from ESR in the first quarter of 2021, with a more than 10x return, having taken the business from nothing to Asia Pacific’s largest logistics real estate platform in less than 10 years. But the private equity firm was loath to part from its star portfolio company.

“We never wanted to let go. When we took ESR public [in 2019] and afterwards, we said it would become a $10 billion company in short order. And it reached that milestone ahead of when we expected,” says Jeffrey Perlman, a managing director and head of Southeast Asia and Asia Pacific real estate at Warburg Pincus. “The slight negative of the private equity business is that, even if it is a great asset, we must still return capital to our investors. And we did that.”

Now, though, Warburg Pincus is returned to the ESR shareholder register with the latter’s acquisition of Asia-based real asset manager ARA Asset Management for $5.2 billion. The GP led a consortium that privatized ARA in 2016 at a valuation of S$1.8 billion ($1.3 billion) and transformed it from a real estate player into a broader real assets platform, trebling assets under management (AUM) to $95 billion.

The transaction comprises $4.28 billion in stock, $519 million in cash, and $387 million in vendor notes. Warburg Pincus, which owns 46.1% or ARA, will receive $273.8 million in cash and a 13.2% stake in the enlarged entity, assuming the vendor note fully converts into shares. The payout could be as much as $832.9 million if ESR seeks to issue new shares, using the proceeds to take out the notes as well as a portion of the new shareholders’ equity. Under this scenario, Warburg Pincus would be left with 9.6%.

What ESR and ARA have in common is exposure to new economy real estate. The original thesis behind the ESR investment was meeting the demand for modern logistics that would come with the rise of e-commerce. The shift towards digitalized consumption has not only increased the burden on delivery infrastructure, but also on the data infrastructure that processes orders before they reach the physical realm. Earlier this year, ESR entered the space with an investment in a data center in Japan.

ARA is further along the same curve. A key element of the transition to a real assets portfolio was the acquisition of Logos, a $17 billion data center business with 8.9 square meters of land across 26 projects (owned and under development). Notably, ARA offers a sustainability angle as well through a renewable energy joint venture with Engie, a France-headquartered electricity utility.

“We think the ability to offer an integrated data center solution, a green solution where we leverage all the rooftops across our logistics portfolio to deliver something that is net carbon neutral, will become very important,” says Perlman. “If you want to build a data center in a place like Singapore, you need to have that offering if you are going to get approval. It is becoming a critical issue for capital partners, tenants, clients, and local governments.”

ESR and ARA’s combined AUM will be $129 billion, including $50 billion in new economy real estate. Over 50% of AUM will come from perpetual and core capital vehicles, including 14 listed real estate investment trusts (REITs).

Warburg Pincus is a longstanding advocate of the fund management model in real estate, as evidenced by ESR moving from an entirely balance sheet business to one in which 90% of AUM is in third-party vehicles. Bringing together ESR and ARA represents a doubling down on this trend – leveraging both the financialization of real estate and greater institutionalization in its management.

“The financialization of real estate started happening 20 years ago in the US. Back then, the REIT market was worth $100 billion. Today it is $1.3 trillion,” Perlman explains. “Asia already has a REIT market in Singapore, Japan, and Australia, but it is going to take off massively in China, where the first C-REIT got done earlier this year. Korea has K-REITs – in 2019, ESR-Kendall Square did the largest institutional one ever at that time – and the same is going to happen in India.”

ARA is already the largest external manager of REITs in Asia Pacific with 11, most of them holding office buildings and retail properties. Combining with ESR, which brings warehousing exposure, and the rise of Logos is expected to feed into a wave of new economy REITs.

As for the institutionalization angle, the objectives are twofold. First, create a consolidated platform able to accommodate global investors that want to write larger checks to a smaller number of managers. Second, offer those investors the opportunity to rebalance their portfolios in favor of new economy real estate without leaving the ESR-ARA ecosystem.

For example, last year Canada Pension Plan Investment Board (CPPIB) sold its position in a mixed-use residential and retail development in Central London to a Singapore-listed REIT established by ARA. In January, the pension plan committed $200 million to a joint venture with Logos in Indonesia that will target logistics, data center, and industrial tenants. Then in March, it agreed to put another $248 million to work in modern logistics facilities in Singapore and Indonesia, also with Logos.

“As ARA acquired Logos, and as we expanded into other alternatives like infrastructure, it created a powerful ecosystem that allows some of the largest global investors that need to divest some of their grade A commercial assets to free up capital to redeploy it back into new economy real estate where they are meaningfully underweight,” says Perlman.

He adds that ESR will inherit 59 new capital partner relationships from ARA. The enlarged entity will count nine of the world’s top 20 real estate investors – that together account for over 40% of global deployment in the asset class – as clients.

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• Topics
• Infrastructure
• Real estate
• Trade sale
• Asia
• Warburg Pincus Asia
• Logistics
• data center