Munich-based Pacific Star Europe is offering European investors global fund of funds solutions and ‘modular' access to a range of Asian funds managed by its Singapore-based parent company. Richard Lowe speaks to former E.ON Energie and Allianz Real Estate employees Dirk Große Wördemann and Matthias Stürmer about the challenges they face in their new venture

In the spring of 2008, Dirk Große Wördemann, formerly chief executive officer of Allianz Real Estate Group, announced to an audience at IPD's annual European conference plans to launch a global fund of funds product spanning the three continents of Europe, the Americas and Asia.

The vehicle was to be managed by Pacific Star Europe, a newly formed joint venture between Singapore-based Pacific Star Group, Große Wördemann and fellow managing partner Matthias Stürmer.

The announcement seemed to stir interest from the fund management delegates in Berlin, understandably given that a new potential source of capital was entering onto the scene.

But the Atlas Global Fund Select (GFS), as it is known, is perhaps more interesting to the European pension fund community for another reason. The structure of Atlas GFS is based on a global fund of funds vehicle created by E.ON Energie to fund the energy company's pension liabilities.

Stürmer, who was previously head of real estate and private equity investment at E.ON, created the vehicle with his in-house team, many of whom have since moved to Pacific Star Europe. The management of E.ON's real estate portfolio is now carried out by Pacific Star Europe on a segregated basis.

But Große Wördemann and Stürmer believe the fund of funds vehicle created for E.ON - Global Property Select (GPS) - was such a market leader in its own right that it made sense to use it as a blueprint for the Atlas GFS. This also means that, despite being a new venture, Pacific Star Europe can point to a track record derived from investing more than €2.5bn in over 50 real estate funds in Europe, the Americas and Asia during the last five years for E.ON.

IPE Real Estate readers may remember that E.ON's GPS won no less than five IPE Real Estate awards in 2007, for Best European Pension Fund, Best Large Pension Fund, Best Pension Fund in the Benelux, Best Indirect Investment Strategy and Best Innovation.

During his five years at E.ON, Stürmer and his team developed a Luxembourg-based platform for both a private equity fund of funds and a real estate fund of funds. The latter included four sub-funds, two of which covered the Americas and Asia Pacific, respectively, while one focused on core investments in Europe and the fourth provided exposure to value-add investments in Europe.

This is similar to Pacific Star Europe's new offering, although Atlas GFS comprises six sub-funds in all, with a core-plus and an enhanced sub-fund for each of the three main continents.

It is possible to invest in one or more of the individual sub-funds, or alternatively investors can gain exposure to all three continents by investing in one or both of the two global feeder funds, choosing either core-plus, enhanced or both. As Stürmer explains, the decision to offer any combination of sub-funds or feeder funds - effectively allowing investors to tailor their exposure both geographically and in terms of the level of risk - came largely from "the experiences we have made within E.ON". He adds: "I think at the moment we are market leaders in global fund of funds structures in Europe."

The real estate fund of funds sector has grown massively over recent years, but Pacific Star Europe is perhaps the first provider to offer such a global umbrella product. Stürmer cites the growing trend over the last five years among European institutions to want to invest in real estate on an increasingly global basis. For European investors to gain full diversification, he says, they need to invest in the US, South America and Asia, because "these markets have a relatively low correlation to Europe".

Pacific Star Europe's strategy is to combine broad global diversification with a focus on local players in each market. "You can have your global asset allocation to optimise your portfolio in real estate," he says. "[But] real estate investment is a local business, so you need a local specialist to invest in Asian or American or European markets. Even in Eastern Europe I think it is better to have a local manager."

As Stürmer explains, the strategy of Atlas GFS is not only to put together a global real estate portfolio, but also to combine the skills and knowledge of local experts in each market.

He believes this makes the fund of funds product attractive to smaller investors, who may be interested in investing in one of the European sub-funds, for instance. But according to Stürmer, it is not only smaller investors (the traditional target audience of the fund of funds sector) who are showing interest in Atlas GFS, echoing one of the findings of a recent survey finding by the European Association for Investors in Non-Listed Real Estate Vehicles (INREV).

"We are discussing at the moment a fund of funds - or a sub-fund - for Europe with small investors in Europe," he says. "And we are talking to large investors about fund of funds in Asia."

One of the biggest drawbacks of the fund of funds model for investors is the double layer of fees it incurs, combining an overall management fee from the fund of funds manager with the management fees of the underlying funds. This was the chief concern of investors when looking at funds of funds, according to last year's INREV survey.

"The double layer of fees is an issue," admits Große Wördemann. However, Pacific Star Europe has looked to move towards a compromise on the issue by charging a management fee only for the first five years, after which they will only charge a performance-related fee. Große Wördemann suggests this ensures there is a "high degree of alignment of interest between our fund management, our portfolio management and the interest of the investors". He adds: "This means that we only earn money if the investor earns money."

Another issue concerns potential conflicts of interest, especially where a fund of funds manager is part of a large investment group that also operates singe real estate funds. Pacific Star Group manages a number of Asia fund products, all of which could potentially benefit from Atlas GFS capital. But Große Wördemann is emphatic that the Atlas structure and its procedures remain completely independent of its Singapore-based parent company.

"Everything is done out of Munich and we are the only ones within Pacific Star operating the fund of funds," he says. "Pacific Star Singapore is not participating in any investment committee or decision-making."

Furthermore, Atlas GFS is restricted to a 20% exposure limit to Pacific Star underlying funds. If the vehicle does invest in Pacific Star funds, investors will benefit from the fees for those funds being waived.

In addition to its role as a global fund of funds manager, Pacific Star Europe does have another important function: to offer European investors access to Pacific Star Group's various Asia Pacific investment products. In the long-term, Pacific Star Europe is intended to act as a two-way conduit between investors in Europe and markets in Asia, and vice versa. According to its marketing documentation, not only does Pacific Star Europe serve as "a global platform for European investors seeking access to the Asian market", but it also provides "a smoother entrance for Asian investors into the European market".

Stürmer, Große Wördemann and their team in Munich have come up with an interesting approach to offering European investors access to Pacific Star's Asian fund products. They claim theirs is the first of its kind: a "modular real estate fund scheme targeting pan-Asia".

Like Atlas GFS, Pacific Star Europe's Asia Fund Select looks to offer investors flexibility, giving them the choice of investing directly in individual funds or via a "pan-Asian basket" managed by Pacific Star. Again, Stürmer and Große Wördemann are looking to attract both investors who are new to Asia Pacific and so are looking for an initial pan-regional exposure, as well as those investors who already have a presence in the area and are looking for more specific or niche investments.

"The bandwidth, in terms of investor demand, is really very broad," says Große Wördemann. "Asia Fund Select is therefore unique and at the moment stands alone as a modular scheme compared with ready-made market products which you have to decide to buy or not to buy."

He explains that the inspiration for the scheme came from knowing what European institutional investors want today, using both Große Wördemann's experience from Allianz Real Estate and Stürmer's experience from E.ON.

"We applied the experience we had on the investor side and said: what would we want if we were to tailor our own products for the portfolio strategy we have in Asia," he explains. "Out of that discussion, the answer was Asia Fund Select, a modular scheme, which is not a fund of funds and which is a direct fund investment opportunity with a local asset manager who employs local teams in local markets."

Asian real estate markets have attracted a growing volume of capital from European institutional investors in recent years, as investors sought to diversify their portfolios on a global basis and the markets in Asia became more mature and accessible, all the while maintaining excellent economic and demographic outlooks.

Today there is more uncertainty surrounding the outlook for the Asian economies and their real estate markets. But in times of uncertainty, it is often the riskier and more exotic investments that fall by the wayside. European investors may feel that in such an environment they are best advised to focus on markets with which they are most familiar.

Stürmer admits that investors face a "totally different picture" when looking at Asia today compared with 18 months ago. He points to the problems in the region's most liquid and mature market, Japan, which is in recession and saw no less than 16 of its listed property companies go bankrupt in 2008, as an indication of how uncertain the region can be.

Having said this, Stürmer is optimistic about the long-term outlook, especially for markets like China and India, which have unparallelled potential for growth, and where their populations already exceed Western Europe and the US put together.
He says: "Looking at the current situation in Asia, we see that it is not disconnected from the global crisis and the global uncertainty.

Therefore, it is very difficult to deliver a short-term prognosis for the Asian market." But there are "fundamental differences", Stürmer argues, between Asia and the Western markets of Europe and the US, and these will lead to a faster recovery among some Asian economies.

Not only does a market like China have a more positive demographic outlook and a greater economic forecast than Europe, for instance, it also has other diversifying factors, such as a very different political and regulatory structure to those in Europe. Whereas one of the major aims of the Chinese government is to urbanise the population, transferring more of them from agriculture work to manufacturing, as Stürmer says, "the game in Europe is totally different".

He adds that most banks in Asia, for instance do not have the financing problems experienced by their counterparts in the US. The main problem for Asian economies is not toxic debt on the balance sheet of institutions, but to maintain its level of exports in order to maintain its high economic growth. In one to two years' time, Stürmer believes there will be very "different pictures" in Asia and Europe.

Große Wördemann likens the current global investment uncertainty to sailing in a ship in thick fog without an operational compass. "It is so foggy that even the normal magnetic compass doesn't seem to work," he says. "You don't know whether the next day north is still north."

He does not expect property transactions and investment activity in Asia to resume until the thick cloud of uncertainty has lifted. In the meantime, Pacific Star Europe continues to evaluate the situation every month and every quarter. Große Wördemann, Stürmer and their team are speaking with investors about the importance of committing capital now despite the uncertainty so they are well placed to take advantage of a recovery when it comes.

"Now is the time to commit to the partner and to the strategy, to be in a position to call the shots when the time is right," he says. Stürmer believes 2009 will prove a difficult year for those with existing Asian investments. However, for investors looking for the opportunity to enter into Asian real estate for the first time, this year will be an excellent time to do so. "It will be bad for existing investments, but extremely good for new investments," he says.

"Investors who had for years the intention to invest in Asia, but had been waiting for a good opportunity to step into this new market, now the opportunity is here or will be here in the second half of 2009."