Market watchers cannot have failed to notice the AUM (assets under management) race between Keppel and CapitaLand Investment (CLI). Both companies have undergone marked structural changes since the pandemic and are vying to be Singapore’s largest listed investment/asset managers.
In March 2023, Keppel announced a target of reaching $200 billion in funds under management (FUM) by 2030. As of end-December 2023, Keppel’s FUM was $55 billion, compared to $50 billion at the end of 2022.
On February 28, at its FY2023 ended December 2023 results briefing, CLI announced a target of $200 billion in FUM (funds under management) to be attained in five years. CLI’s FUM as at Dec 31, 2023, stood at $100 billion. CLI’s AUM as at Dec 31, 2023, was $134 billion. CLI’s AUM includes assets it owns on its balance sheet as well as those in its funds, REITs and property trusts.
Despite this, Keppel has a better chance of attaining the $200 billion mark earlier because it is more of an alternatives manager, which is able to build, own and operate infrastructure assets such as cable systems, power generators and renewable energy.
Elsewhere, Mapletree Investments is in the final year of its third five-year plan which had an AUM target of $80 billion to $90 billion. As at March 31, 2023, it had AUM of $79 billion of which 77.7% was third-party money.
Singapore-based GLP Capital Partners has AUM of US$128 billion ($171.3 billion) based on its website. Hong Kong-listed ESR Group has AUM of US$150 billion as at end-2023, based on a March 11 announcement by the company. Elsewhere, TPG, which is 4.31% owned by Temasek, has “total” AUM of US$222 billion as at Dec 31, 2023, based on its FY2023 results announcement.
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Why are so many companies in a hurry to bulk up their AUM? It is for the fee income. The advantage of a strategy based on fee income, fee-related earnings, or other types of recurring income is the stability of earnings, including net profit, stability of dividends, higher return on equity, and better total shareholder returns.
The advantage of having not more than 20% in a fund sidesteps the volatility of mark-to-market gains and losses such as fair value revaluations which can create volatility and lumpiness in net profit.
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Keppel pulls ahead
“When Phase 1 of the acquisition of Aermont Capital is completed later this year, our FUM would grow to about $79 billion, bringing us close to 80% of our interim target of $100 billion by 2026. We remain laser-focused on achieving our FUM target of $200 billion by the end of 2030,” said Keppel group CEO Loh Chin Hua, on Feb 1, during Keppel’s results briefing.
In November last year, Keppel announced the acquisition of Aermont Capital for $517 million for an initial 50% stake. Aermont had total FUM of $24 billion as at June 30, 2023, across four active funds and a single asset vehicle, of which approximately $10 billion in equity commitments were raised in 2022. Aermont’s investments have included assets and businesses in the office, student accommodation, workforce housing, luxury hospitality and production studio infrastructure sectors, mainly in Europe.
“With value-add from Keppel, we believe that Aermont’s FUM can grow by 2.5 times to approximately $60 billion in 2030, through the co-creation of European credit funds, data centre funds and various private investment vehicles, and potentially REITs,” Loh says.
The infrastructure advantage
What else would Keppel have up its sleeve? Just as Keppel is laser-focused on its $200 billion target, the Singapore government is focused on achieving net-zero renewable energy. The island is small. Its limited land and water spaces will not be able to house solar panels and other renewable energy sources.
As an example, Sembcorp Industries U96 has been granted conditional approval to import 1.2 gigawatts (GW) of low-carbon electricity from Vietnam. The imported electricity will make use of offshore wind power and potentially other forms of generation, transmitted from Vietnam to Singapore via new subsea power cables.
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Meanwhile, Keppel’s pivot to renewables includes developing the Keppel Sakra Cogen Plant, Singapore’s first hydrogen-ready power plant; green data centre solutions; and building the Bifrost subsea cable system, a trans-Pacific cable system. Keppel’s sustainable urban renewal (SUR) initiative includes the closing of RMB1.6 billion ($304.4 million) for its China-focused SUR programme.
“Infrastructure is expected to be one of the fastest-growing asset classes in the years ahead, supported by global trends such as the energy transition and push for decarbonisation, as well as rising demand for digital connectivity. We have seen recent M&A transactions involving major global asset managers, as they sought to expand in the infrastructure space,” Loh says.
Similarly, during a results briefing on Jan 31, Kevin Neo, CEO of Keppel Infrastructure Trust A7RU ’s (KIT) trustee-manager, had indicated that KIT would be able to attain a target of $18 billion in AUM in a decade, up from AUM of $8 billion as at end-2023. “We see opportunities in the energy transition sector, and we can cast our nets wide and explore subsea networks, cable networks and subsea vessels,” Neo had said.
KIT is also an offtake vehicle for Keppel and has a close relationship with its sponsor. On Jan 29, KIT’s trustee-manager had announced that the concession agreement with Singapore’s National Environment Agency (NEA) for the Senoko waste-to-energy (WTE) plant has been extended by three years and comes with an option to further extend for up to one year. The total contract value, including the option of up to one-year extension, is approximately $300 million, of which approximately $80 million will go towards the refurbishment of Senoko WTE plant.
Keppel Seghers, the environmental technology and engineering solutions unit of Keppel’s infrastructure division, will be refurbishing the Senoko WTE plant as part of the agreement. Keppel Seghers has its operating and maintenance service contract extended by three years, with an option to further extend it for up to one year. “Our ability to create value will set us apart from the rest,” Neo had said on Jan 31.
Among some of Keppel’s fund initiatives, in addition to its SUR programme, its Keppel Core Infrastructure Fund achieved US$575 million on its first closing and it launched Keppel Infrastructure Fund II.
CLI’s uphill task to $200 billion
The path towards $200 billion in AUM is not so clear for CLI. Lee Chee Koon, group CEO of CLI, explains: “I will say this is a relatively ambitious target sitting in today’s environment and looking at the geopolitical environment. Everything is uncertain, interest rates are still elevated. I think it’s important that we set a challenging target, but I think it’s still within the means of what we believe we could achieve through organic growth.”
Analysts have said that CLI is unlikely to achieve this target without acquiring a platform, and this caused its share price to fall in the immediate aftermath of its results briefing on Feb 28.
“I would say, [this includes] the acquisition of good platforms that could complement our existing capabilities to allow us to raise new capital to offer new products to many different capital partners. I spend a lot of time on the road together to meet [our] capital partners. I know where the interest is, I know where the appetite is,” Lee continues.
“I don’t believe we should participate in a bidding process. Buying an asset management platform is about buying a team of professionals and the team must be aligned and we will not just buy any platform that will give us the AUM,” Lee says.
On the other hand, the pace of “inbound enquiries” has increased as platforms are now in “a seller’s market”. “During the low rates environment [there was] an expectation of paying high multiples. Now, the majority of opportunities comprise of someone calling us to say we would like to talk to you,” Lee reveals.
“The pendulum has shifted and existing platforms are concerned about bifurcation where the big five are getting the business or you are hyper-specialised and you do something very well. If you’re stuck in the middle, then you’re in trouble, you can’t attract capital. So these guys need to find the right partner. And this is where I think it’s interesting for us because then we can set the price. We don’t want to accept invitations to join in bidding wars. If you feel that we are the right partner for you, then the word on the street is that we are very curious. You will reach out and talk to us personally, we will take the time to get to know you. And we will pay you a fair price for what we both then conclude and believe it’s the right combination,” Lee explains. “You must pay a fair price for a good platform and not a cheap price for a lousy platform.”
In an update, JP Morgan says the $200 billion FUM target represents “a doubling over five years, with potential 8%–10% growth from listed funds ($61 billion) and 5%–7% growth from private funds ($39 billion). CLI continues to seek to enhance its capabilities via M&A of asset management platforms with a focus on geographies outside of China, such as Japan, Australia and Europe. CLI is seeing more seller interest, especially among smaller asset managers, with the market moving to favour the buyer rather than the seller”.
JP Morgan adds that CLI would prefer to negotiate a fair price and not pay over a 20 times multiple. As a comparison, Keppel is paying 13 times EV/Ebitda for Aermont.
CLI’s private fundraising grew 42% y-o-y to $3.5 billion in FY2023 ended December 2023. In the first two months of 2024, this figure grew to $3.9 billion. In addition to deploying $700 million in existing funds this year, CLI announced it had set up the CapitaLand Ascott Residence Fund II (CLARA II) to acquire two lyf-branded properties in Singapore and Japan. The target size of the fund is $800 million.
In FY2023, CLI closed four funds comprising the CapitaLand Wellness Fund (C-WELL, $350 million), the CapitaLand India Growth Fund ($368 million), CapitaLand China Data Centre Partners ($530 million) and CapitaLand China Opportunities Fund ($2.1 billion).
Of CLI’s $100 billion in FUM, 71% are perpetual, with $61 billion of FUM in listed entities and $39 billion in private funds. CLI’s capital partners include insurance funds (39%), sovereign wealth funds (22%), pension funds (18%) and others such as corporations and banks.
As at Feb 28 this year, CLI has 20 private funds. The $39 billion in FUM comprises $24 billion in committed equity, with CLI’s share at $5 billion.
Where is the opportunity?
Benjamin Chow, head of real assets research for Asia at MSCI, says both Keppel and CLI announced new capital partnerships last year despite the challenging capital raising environment.
In addition to the Aermont transaction, Keppel bought Wilkie Edge with PGIM, started a new fund in the education sector and acquired assets in Australia.
“"Based on these recent capital commitments, it's clear that appetite remains healthy for emerging sectors like living, student housing and self-storage," Chow says, referring C-WELL and CLARA II.
In October last year, CLI and a Thai company announced they had committed $350 million in an initial equity investment into C-WELL. The fund’s target equity size is $500 million with an option to upsize to $1 billion in equity and $2.9 billion in AUM.
In February this year, CLI established CLARA II with a target equity size of US$600 million with equity commitment by global institutional investors from Europe and Asia.
Paul Tham, group CFO of CLI, says the group has three priorities to increase total shareholder returns. The first is establishing new funds and growth organically; the second is M&A to add FUM. The third is likely to be share buybacks and dividends.
As for structuring, Chow of MSCI says there is little appetite for core investments “because returns are the same as T-bills. We see more appetite at the higher end of the risk spectrum”.
""With the yield on most deals under borrowing costs, investors have had to resort to more creative deal structures to close deals. For example in a handful of deals, buyers have used convertible debt to lower borrowing costs at the expense of a potential equity dilution in the future," Chow says.
Leverage is not really what investors in funds are looking for. On the other hand, convertible debt could make a return. Chow cites an interesting structure by Link REIT.
In February, Link REIT announced it was acquiring the remaining 50% of Qibao Vanke Plaza for RMB2.38 billion. In 2021, Link had acquired 50% of Qibao Vanke Plaza for RMB2.77 billion.
“"One of the interesting things is they bought the asset at a lower valuation than the previous deal, but with a "sell-down clause included. This clause allows for the seller (China Vanke) to get a cut should Link sell stakes in this asset at a higher valuation to third party investors," Chow says.
Link was understood to be looking for capital partners for its Singapore acquisitions last year when it acquired Jurong Point and Swing By @ Thomson Plaza, but so far the REIT has not announced any partnerships.
For Keppel, its innovative SUR Fund (Surf) in China has the option to be upsized to RMB3.9 billion. Keppel says Surf’s programme is being implemented in Singapore, China, India, South Korea, Japan and Australia. Keppel aims to scale the investments in this area through SURF to US$2 billion.
On March 13, the Australian Financial Review reported that Singapore Telecommunications Z74 (Singtel) was about to divest its Australia subsidiary Optus to Brookfield for A$16 billion ($14.1 billion). Singtel denied the report within hours. “There is no impending deal to offload Optus for the said sum, as reported,” said the telco’s carefully worded statement.
Nonetheless, there was consternation among some market watchers that Optus was not offered to Keppel. Brookfield would most likely syndicate Optus to a bunch of capital partners and place it in one of its infrastructure funds, analysts suggested.
Instead, Keppel, which is seemingly reluctant to sell M1 to StarHub CC3 as widely speculated, could undertake the strategy as a connectivity operator. After all, it too can syndicate the investment in an infrastructure fund, and the transaction would help Keppel on its way to $200 billion.
In March 2023, Keppel received conditional approval from the Energy Market Authority (EMA) for the long-term import and sales of 1GW of low-carbon electricity from renewable energy sources in Asean. Keppel also signed a long-term power purchase and export agreement with Cambodia’s Royal Group Power for the latter to supply and export, and Keppel to import low-carbon electricity into Singapore.
The power will be transmitted through onshore high-voltage transmission lines and subsea high-voltage transmission cables from Cambodia to Singapore and supported by proven energy storage systems such as hydro storage and batteries.
Keppel has said this is the first renewable energy import into Singapore as part of the Lao-Thailand-Malaysia-SIngapore Power Integration project to facilitate the successful implementation of the large-scale import of renewables and low-carbon energy.
“Keppel is in an enviable position, as we are already an established infrastructure asset manager and operator, with a strong track record. We also have deep domain knowledge and operating capabilities in multiple asset classes, allowing us to provide more fund products and better value propositions to our LPs [limited partners]. In 2024, we will continue to expand our fund offerings, as well as pursue a deal flow pipeline of over $14 billion, the majority of which are in the infrastructure and connectivity spaces,” Loh said on Jan 31.
Other real estate investment managers with a Singapore connection could get to $200 billion before either Keppel or CLI. ESR with its US$150 billion in AUM and GLP Capital Partners with its US$128 billion in AUM are contenders. As a comparison, Brookfield Asset Management, the company many in Asia aspire to, has AUM of US$850 billion as at end-December 2023.
