By Peter Harris
Capital Services Group talked to J@pan Inc about how their business has grown from Japan to the whole of the Asia region and about resetting the agenda in integrated loan servicing, real estate asset management and servicing technology solutions.
Asia at the center
Writing in the aftermath of the Asian Financial Crisis in a paper published by the Harvard Institute for International Development, authors Jeffrey Sachs and Steven Radelet comment, “History, Nehru observed, is written by the victors. Financial history, it seems, is written by the creditors.”
They refer to the fact that the debtors, lumped together as the Asian capitalist economy, were blamed for the region-wide slump and financial chaos of summer 1997. Whether this is a just verdict or not, the legacy of the crisis was such that in Japan and other Asian countries, reforms were implemented and efforts were made to render the regulatory systems and financial infrastructure more robust. The long-term consequences of the post-crisis reforms are manifold but there is a strong argument for saying that significant improvements have been made, and now, as the investment community licks its subprime wounds, Asian economies are well placed to once again become the focus of new business and reinvigorated commercial investment.
Since the subprime crisis, much of the financial services industry’s attention has been focused on both emerging markets, and improving regulation. From a regional perspective Asia fits both these trends—it is an area that encompasses a fertile balance of new opportunity, particularly in China and Southeast Asia, as well as highly developed, well-regulated financial hubs such as Tokyo, Hong Kong and Singapore. Since its imperial supremacy at the end of the nineteenth century, the Japanese economy has been a leader in the region and its maturity, as well as those of the Tiger Economies that are tied to it, is now reaching a new level of sophistication and development.
Indeed, it seems that the boot is on the other foot when you have the new governor of the Bank of Japan, Mr Shirakawa, attempting to give advice to the US about how to handle the subprime crisis, urging the government to bail out the banks as Japan did in the late 1990s. Outraged at his comments, the Financial Times reports Richard Fisher of the US Federal Bank as retorting, “You are not even comparing apples with oranges…These are totally different societies, different economies, different political systems.” Maybe so but Japan has history on its side—for all the criticism it receives about being sluggish it has reformed dramatically in the last decade and the full effect of the Koizumi era is yet to be felt. Japan is even taking its own measures to increase investor confidence by amending the REIT law. Similarly, in an effort to increase transparency in the commercial real estate debt securities market, the Commercial Mortgage Securities Association’s Japan chapter (CMSA Japan) has announced plans to introduce the same type of standardized Investor Reporting Package (IRP) that is already in use in the US and Europe.
Financial services industry expert and CEO of Capital Services Group (CSG), Carl Everett captures this dynamism neatly when he tells us, “We feel that Asia is once again becoming the ‘center of the world’—the opportunities are endless.” Senior Vice President Steve Norrell, who also chairs the CMSA Japan standardization sub-committee which is pushing forward the development of the standardized reporting package for investors, agrees: “Although the market is quieter at the moment, this is a period of structural consolidation that will make business all the more vibrant when activity picks up again.”
CSG has its principal office in Tokyo as well as maintaining a presence in seven other Asian markets (see map). Everett and his team see the Japanese market as offering long-term stability and sustainable growth while the demand for their services in Southeast Asia has shown them the buoyancy and opportunity in the less mature economies of the region. By way of an example, MD and Representative Director Andrew Hughes says, “Thailand never ceases to surprise us—we expected recent political issues to cause a downturn but on the contrary, our clients’ business continues to see significant growth there and we have been able to develop our own operations there in tandem with their successes.”
With billion-dollar investors as its clients, CSG can be said to have the last decade of Asian financial history imprinted upon its development. While growth has been driven by the ambitions and triumphs of such investors, the group’s decision to focus on Asia, and build a niche for itself as regional experts, is a success story in its own right.
Borrowing and building
The first CSG entity, Capital Servicing Co., Ltd., was established post Japan financial-crisis in 1998 to service non-performing loans, made during the bubble years, initially for major US investment banking clients in Tokyo. Since then, the scope of the group’s operation has expanded to incorporate three core services:
1. Loan servicing
2. Real estate asset management
3. Servicing and reporting technology solutions
These days its clients are generally either high-level investors who wish to outsource servicing or real estate asset management functions, or overseas investors who have a desire to invest in Asia but have no presence on the ground; the latter have a critical need for reporting and local market expertise. More recently, Japanese finical institutions looking to diversify their investment strategies across Asia have become a new client category as they seek an investment partner on the ground in multiple Asian locations.
While CSG’s three areas of expertise are distinct, they do all feed into one another and have grown organically to meet the evolving needs of the market. Starting out as a loan servicer, asset management skills were a key part of the operation and, for the working out of residential and commercial mortgages, extensive knowledge and understanding of the Japanese real estate market allowed the group to serve its clients effectively. From initially dealing with only non-performing loans, CSG now services both performing and non-performing commercial and residential loans; including a large volume of securitized loans. To date, CSG has serviced over 25 securitizations with an origination value of over US$4 billion. The group maintains a unique Asian focus employing the same multi-lingual and multi-currency systems across its entire regional platform.
With this skill set and experience, the real estate asset management side of the group has been a natural, parallel development and the firm now performs the full range of real estate services from deal sourcing, real estate accounting, due diligence and construction project supervision to strategy consulting and fund management. There is also a hospitality asset management speciality unit.
The growth and ambition of this business line, which in Japan comes under the mandate of the group’s licensed real estate entity Capital Realty Inc, is immediately evident in its latest announcement in March this year of a partnership with a local Japanese developer to create the Capital Asia Partners Real Estate Investment Fund (CAPREF)—a real estate investment platform that will invest in real estate in Japan and across the region. Capital Realty President Jeff Stone perceives a rise in investor desire to place capital in Japanese real estate and says that in order to do so there are three key requirements, “speed, execution and access to deals.” The rationale behind the partnership with the development partner is to make use of its ability to provide an exclusive pipeline of deals and exploit its strong local expertise in synergy with the group’s existing capabilities.
A striking feature of this latest strategy is that the group is prepared to invest its own capital along with that of its clients. Being prepared to put its money where its mouth is, is an entrepreneurial approach that makes sense in terms of aligning vendor-client interests and hopefully translating into lucrative returns.
The third side of the business, the technology solutions division, not only pulls the loan servicing and real estate strands of the business together but is inseparable from their smooth operation. Developed in-house since 2002, the Servicing Company Operating and Reporting Engine, SCORE, is a web based software application designed to manage and report on loan and real estate assets. It is under constant innovation having started with non-performing loan functionality and is now, in the words of MD Neil F Hagan, “a commercially viable solution spanning the lifecycle of each product covering all aspects performing, sub and non-performing loans—in short SCORE is an agile and flexible system that works as a regional platform.” The software is multiproduct, multi-lingual and multi-currency and has actually already been licensed for use outside of Asia by third party clients with investment portfolios in Portugal, Turkey and the UK. The rating agency Fitch Ratings describe the IT system as “flexible and well integrated,” while the Standard & Poor’s servicer evaluation that we saw referred to it as “an excellent computer system that boosts operational efficiency.” With the 2007 addition of a robust reporting engine, SCORE is ready to provide investors, market participants, and regulators with the powerful real time reporting, transparency and analytics demanded in the fallout of the subprime crisis.
Recognizing SCORE as a valuable piece of IP, CSG has set up a new company in Singapore to act as a holding company for all its mortgage technology and in-house developed systems throughout the region. Given that the technology is already being licensed outside of Asia by third party clients, Hagan envisages this side of the business continuing to develop globally and is therefore comfortable with the logistical agility that the Singapore base will provide.
The services CSG provides are focused on a particular geographical location and a particular industry, however, both of those fields are wide enough for it to have the look of both a general expert as well as a boutique operation—it is spread across the region but possesses localized regional expertise; it provides a range of services but is focused on real estate and servicing loans.
This blend is also manifest in the company’s recruitment strategy and corporate culture that takes as its slogan “local knowledge, global standards.” The senior management hail from a range of countries and the group has locally trained experts at high levels in all of its regional offices. Normally a foreign member of the team will head up a new office and then recruit people locally. Everett comments, “Getting the right people is a challenge both locally hired and ex-pats—in the future we want there to be more locals managing. When your commitment to the region is long term, expat management is a band-aid and we are gradually moving away from that.” Everett continues that one of his proudest achievements is having learned, and not always the easy way he was quick to point out, how things work differently in Japan and how to mould the company culture to accommodate cultural differences. For example, he has been able to make employee incentive systems fi t with local cultural norms while encouraging both team and individual performance. Hughes calls this a “fusion of Western best practice with local knowledge and Japanese work ethic.”
Similarly, in its approach to regulatory and compliance issues CSG aims to satisfy local and worldwide standards. For example, it has implemented a SOX compliant risk and data management regime whilst also liasing closely with lawyers and accountants to make sure things are done by the book in the individual markets in which they operate. Sensitivity to the locality has also fed into CSR activities which the group takes seriously and has a high level of employee involvement—in Thailand it paid for and helped build a school and a hospice for terminally ill AIDS sufferers.
Thus, as investors take a deep breath, firms such as CSG are bracing themselves and preparing for the return to action in Northeast Asia while being kept busy in the Southeast. It seems likely that in the midterm the sparks from the region’s higher risk/higher yield markets will re-ignite the safer but slower Asian economies and the financial heavyweights of Singapore, Hong Kong and Japan.