Principle unveils Granite Capital opportunistic property fund

Principle Advisory Services has launched a separate fund of funds (FoF) business, the first product for which will be an international opportunistic property fund.

Principle is a placement business which concentrates on private equity and infrastructure founded by private equity specialist Les Fallick, who has funded the new company, called Granite Capital. He announced the launch of Granite Capital at the Investment & Technology Absolute Returns Funds conference in Melbourne last Thursday. Granite Capital is looking to raise $300 million in the first fund, which will invest in between 10 and 15 property managers who will be selected by the Townsend Group of the US, a specialist property advisory company. Fallick said that a second FoF was also in development. This would invest in managers who specialise in what is expected to become an enormous market in carbon trading around the world. Opportunistic property marries some of the skills of private equity managers in transforming businesses, with property skills. It has more risk than “core” property – where yield is the most important thing – because there is usually a development component involved. One of the few to be offered in Australia is a fund managed by Franklin Templeton. Veronik Verkest, a director of Granite Capital, said yesterday that the FoF structure was designed specifically for Australian super funds and to minimise what could otherwise be onerous taxation “leakage”. This meant that the fund would not invest as much in countries which did not have tax treaties with Australia or where the tax burden could not be significantly reduced. She said that Principle had been representing Townsend in Australia since she joined the company from Russell Investment Group in 2004 and many super funds had indicated that they would prefer to invest in an FoF rather than use Townsend as an adviser and invest directly. Townsend was founded by its directors Terry Ahern and Kevin Lynch in 1987 as a specialist property investment consultancy. It has 22 consultants servicing about 80 institutional clients and eight analysts researching about 300 property managers around the world. The first fund will invest in Asia, Europe and, to a lesser extent, the US. The problem with the US is the FIRPTA tax regime which can involve a tax leakage for foreign investors of more than 35 per cent. Fallick said that taxation for Australian investors, when not minimised through specialist vehicles, could cost a fund 400-500bps in net returns. Verkest said that the opportunistic property fund should provide a return net of fees and taxes of more than 12.5 per cent. The underlying managers would be expected to deliver net returns of 15-16 per cent. Although the managers adopt many of the roles of private equity managers, such as a hands-on relationship with their investments, their fees tend to be less – halfway between private equity fees and infrastructure fees. Granite Capital’s fees are an 80bps base and 5 per cent success fee (on a 10 per cent hurdle).