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Lessening the impact of mark-to-market

Goola Warden
Goola Warden • 5 min read
Lessening the impact of mark-to-market
Companies pivot to asset management for fee income to boost earnings, and to sidestep mark-to-market impact on net profit
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The focus on managing real assets rather than owning them lightens the balance sheet, provides a greater return on equity, and enables earnings, including net profit, to be more stable. Stable net profit growth leads to sustainable and growing dividends which are beneficial for shareholders. 

The grandfather of the real estate investment management business in Singapore is John Lim, who founded ARA Asset Management with a focus on managing funds. Subsequently, Fortune REIT, managed by ARA but with sponsor Cheung Kong Holdings (now CK Asset) was listed on the Singapore Exchange S68 -

, followed by Suntec REIT.  After ARA was privatised in 2017, its AUM grew rapidly to $100 billion. ARA was subsequently acquired by ESR Group in 2022 with a mix of cash and shares.  

Analysts have also pointed out that the largest shareholder of CapitaLand Investments and Keppel is Temasek, which provides a portion of the net investment returns (NIR) of Singapore’s budget. In 2023, NIR contributed 19.5% to the budget — a figure often cited to stymie critics of GST, that GST rate hikes would be higher if not for Temasek and GIC.

CLI’s operating patmi is from two main sources, its fee income-related business (FRB) and real estate investment business (REIB). The FRB comprises fee-related earnings (FRE) from listed funds management, private funds management, lodging management and commercial management (previously the property management business). Commercial management is CLI’s operating part of the business where it manages the properties in its funds and REITs. 

REIB comprises CLI’s sponsor stakes in listed funds, its general partner (GP) stakes in private funds and effective stakes in assets owned on its balance sheet such as ION Orchard. 

Keppel has divided its businesses into infrastructure, connectivity and real estate. Its recurring income comprises asset management income and operating income. The power of Keppel’s structure is the ability to operate data centres, power plants and more recently, other infrastructure assets such as the Bifrost Cable System. 

While Keppel declines to comment on power cables that will in the next few years bring renewable energy to Singapore, that surely represents potential AUM for Keppel, along with income from operating the assets.  

Fees and returns

Why the focus on AUM and FUM? The bane of REIT investors is management fees, which compensate the fund manager for making investment decisions, conducting research and performing administrative duties related to the fund. This fee can range from 1% to 4%, with most funds settling at around 2%. 

See also: Man + Machine works better than Man vs Machine, says UOBAM

The REITs’ fees are usually at around 40 basis points (bps) to 50 bps of AUM with a performance fee that is related to the REIT’s growth in distributions per unit (DPU). Of course, REITs have property management fees as well as acquisition and divestment fees. Fee income is the holy grail of corporates as it usually goes to the bottom line giving high ROE levels for minimum capital deployed.

Private equity funds work a little differently from REITs as these have a finite life. In addition to the 1%–2% in management fees in private funds, GPs and limited partners (LPs) in private funds have access to “waterfall distributions”. As an example, waterfall distributions were amply described in City Development Ltd’s (CDL) profit participation securities (PPS). 

For instance, when PPS2 was unwound back in 2019,  the payouts followed a distribution waterfall such that when the assets were divested, the priority was to repay the senior loans, followed by repaying the LP, a Keppel-managed fund (Alpha fund). Then a preferred return to the Alpha fund amounting to a total internal rate of return of up to 12.6% a year was paid. After that, CDL, the GP in the PPS, was paid its capital. Thereafter, whatever cash flows remained were split 60:40 between CDL and the Alpha fund.

This final share of the profits is often termed carried interest, where the GP is paid an incentive compensation after achieving a specified minimum return. Carried interest serves as the primary source of compensation for the GP, typically amounting to 20% of a fund’s returns. 

Size matters

In general, to get to a stage where economies of scale lead to higher returns, asset managers and real estate investment managers need a certain AUM/FUM. 

As an example, CLI group CEO Lee Chee Koon points to its lodging arm, The Ascott Ltd (TAL), as having attained a level where its fee income goes straight to CLI’s bottom line. 

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“The Ascott business was asset-heavy. We have converted it to asset-light, and it is highly ROE-accretive in terms of fee income. It is a business many people would like to own,” Lee says. In FY2023, TAL reported a 28% y-o-y increase in FRE to $331 million, and the largest contributor to CLI’s FRE. 

Paul Tham, group CFO of CLI, points out that real assets provide yields of 4%–5%. “As we divest those assets and seed new funds, this generates 20% ROE. “Ascott gives us 20% ROE. Our goal is to get to a double-digit ROE in three years. There is a certain degree of execution, and also market factors, e.g. [the ability to divest] ION Orchard, the multi-family portfolio in the US and the Chinese assets,” Tham says. 


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