22 November 2017
The Hong Kong-based private equity real estate firm has undergone an MBO as it readies its fourth opportunity fund.
At the late stage of a market cycle, it is commonplace for investment managers to test the waters ahead of a potential sale. It is all the more remarkable, then, that Hong Kong-based private equity real estate firm ARCH Capital has opted to execute a management buyout at this lofty point in the cycle.
“I’m doing the reverse,” said ARCH founder Richard Yue, who led the buyout. “We’ve never considered selling the firm. There’s so much more we can do to generate value.”
In a transaction concluding last month, Yue, who is day-to-day the firm’s chief executive officer and chief investment officer, has led the purchase of a 50 percent stake in the company he formed in 2006 from The Rohatyn Group. The deal brings the New York-based emerging markets private equity and hedge fund manager’s six-year joint-ownership to an end. Following completion, Yue and his management team own 100 percent of the firm.
Terms of the sale were not disclosed, but PERE was told the deal sees TRG relinquish its two investment committee seats. Today, the six-strong committee only has one outside presence, retained by ARCH’s original joint shareholder and cornerstone investor, Philippines family-run conglomerate Ayala Corporation.
Has the investment been financially beneficial for outgoing TRG? “Absolutely,” responded Yue. “This has been a good financial investment. They came in when we raised Fund II. It had deal-by-deal carry, so they benefited from that. I’d think they should be walking away happy.”
For Yue, the main reason for buying out TRG concerned a preference for total control. While TRG’s initial purchase of the stake from Ayala met a strategic objective of the New York firm to increase its Asian footprint while also establishing a presence in the real estate market, typically the firm acquires controlling stakes, something that was never on the table with ARCH. “I’d always intended to gravitate the economics to the team. Ownership, is a big deal to me.”
Yue’s TRG counterpart, CEO and CIO Nicolas Rohatyn agreed a separation was the best solution. He said: “While we have enjoyed six fruitful years of partnership with ARCH, the time is right for Richard and his team to realize their vision of operating a fully-owned, independent firm.”
With the dust settling on the MBO, ARCH now has its sights set on raising a fourth pan-Asia opportunity fund. Yue declined to comment but PERE believes paperwork for ARCH Capital Asian Partners IV is now being drawn up. Similar to predecessor vehicles, the firm is understood to be targeting a $500 million fundraise for value-add-to-opportunistic investments in markets including mainland and greater China, Thailand and the Philippines. It will target an internal rate of return between 18-20 percent and 1.8x-2x equity multiple.
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