Harvest Capital faces crucial investor vote

The only live private equity real estate fund at Harvest Capital Partners faces the prospect of its investment activities being halted after the resignation of the Hong Kong firm’s founder triggered a key man event.

Harvest Capital, which overall manages more than $1.5 billion of capital commitments for real estate in mainland China, must convince the investors of its CR China Retail Real Estate Development Fund I, of its stability and its ability to execute ahead of a crucial vote next month to reactivate or not the vehicles’ investment programme.

The firm, which is now 100 percent owned by China Resources Group, lost its founder and chief executive officer Rong Ren earlier this month after he decided not to be part of the China state-owned conglomerate’s plans to expand its investment activities to become a multi-sector focused private equity firm. His departure precipitated the further departures of another nine staff leaving just 26 of the firm’s original 36 employees.

CR China Retail Real Estate Development Fund attracted $466 million in 2010 and has since been approximately 55 percent deployed into a pre-identified series of retail mall developments developed in partnership with SZITIC Commercial Property, another China Resources Group company. The fund’s capital has been deployed mall by mall as Harvest Capital worked its way through the developments, each mall requiring investor approval before capital is released.

But as the designated key man in the fund, Ren’s departure triggered a key man event which effectively halted the fund’s investment activity, consequently placing the remaining 45 percent, or approximately $211 million, at a standstill. Next month, the fund’s investors will vote on whether to reactivate its investment programme and a two-thirds majority is needed to proceed.

Gerald Yung, head of transaction management at Harvest Capital, told PERE he was confident of a positive response given that the first four developments invested via the fund, are, to date, projecting returns: “in line with our underwriting assumptions”. According to marketing materials for the fund, obtained by PERE at around the time of its launch at the start of 2010, the vehicle is expected to generate returns of 20 percent IRR, in line with most opportunity funds focused on China.

Another factor that may precipitate a positive vote from investors is the fact that, of the 10 staff to depart, four were part of its capital raising team and the firm is not currently in capital raising mode. The remaining vacancies are expected to be filled by staff from elsewhere within China Resources and a replacement for Ren is expected to be identified “over the course of the next few weeks” the firm said in its announcement of his resignation. In the meantime, leadership of the firm has fallen to Jiang Wei, chairman of China Resources Capital, the China Resources division directly responsible for Harvest Capital. He is also vice-chairman of Harvest Capital.

To learn more about Harvest Capital’s plans to become a multi-sector private equity company, catch the incoming June issue of PERE.