EXCLUSIVE: China’s Trophy fund close to positive conclusion

There is a happy ending in sight for the 145 investors of the Trophy Property Development Fund, once one of China’s most troubled property investment funds, after it emerged that the majority of the equity they invested in the vehicle is likely to be returned.

PERE can reveal that Apollo Global Management, the New York-based private equity firm, is just weeks away from agreeing heads of terms to sell its majority stake in the fund’s single asset, a large mixed-use property in the upmarket Xintiandi area of Shanghai, to its joint venture partner and the property’s developer, Shui On Land.

The transaction would see investors recoup 0.8 times the equity they originally invested. While that represents a loss on the approximately $1 billion originally committed to Trophy in 2008, it represents a significant increase in value from when the fund’s equity was written down to just $430 million in 2013. That was after its investments, initially five minority stakes in Shui On Land developments across Shanghai, Wuhan and Chongqing, failed to perform as expected.

A sale therefore represents something of a vindication of a complicated agreement struck at the end of 2013 which saw the minority stakes swapped for the majority stake in the Shanghai asset, known as Taipingqiao (TPQ) 116, and the spinning out of the fund’s management team from its previous owner, the Hong Kong-based hedge fund Winnington Capital.

The team, which is led by ex-Warburg Pincus and GE Capital Real Estate Asia head Philp Mintz, has spent the best part of the last two years improving the value of TPQ 116. That has been achieved largely via a combination of the asset swap completing and a more positive outlook for TPQ 116 generally.

Issues relating to its development have been ironed out and that has meant the asset’s potential is far more likely to be realized than it was before. Development has already begun and when it is completed the site should accommodate approximately 300 homes across 271,468 square feet, 330 parking spaces and a club house.

Trophy’s investors received their first distribution last week after Mintz’s team and Shui On agreed put and call options worth a combined $162 million. That has led to Shui On’s restructured holding in the joint venture that controlled TPG 116 to increase from 18.9 percent to 40 percent. PERE has heard in the market that discussions between Apollo and Shui On concerning the sale of the remaining 60 percent are at an advanced stage, and a deal could complete by the third quarter.

A completion would bring to a close a tumultuous journey for Trophy’s investors, ranging from large pension funds to individuals from investment banks, which had been wooed by the prospects of investing in China’s growth story and through the close relationship between Winnington founder Kenneth Hung and Shui On Land’s famous leader, the property mogul Vincent Lo. But when it became apparent that spiralling costs, development delays and conflicting approaches to development caused clashes between them, the investors were caught in the crossfire of a bitter feud.

Each side appointed legal representation but before things became too litigious, the asset swap and management spin out solution was brokered by Mintz and Shui On’s advisor Rachel Tan, the founder of another private equity real estate firm called TAN-EU Capital, which historically has had dealings with Shui On-controlled developer SOCAM Development. Subsequently, with the fund’s troubles behind it, Mintz’s team has been able to rescue more than $300 million of value.

The sale also vindicates a decision by Zug-based private markets investment manager Partners Group, which acquired 12 percent, or $200 million, of the fund’s original equity, in August last year. Having bought out 31 of the fund’s investors via the secondary transaction at a discount to even the adjusted, written-down valuation, its windfall is likely to be sizeable.

None of the firms involved would comment.