ASIA NEWS: Harvest Capital 2.0

Don’t call Harvest Capital Partners, which manages $6 billion of property, a private equity real estate firm anymore. These days, the Hong Kong-based subsidiary of state-owned China Resources Group (CRG) has aspirations to be more like a Chinese version of The Blackstone Group or Kohlberg Kravis Roberts & Co.

That is how Gerald Yung, Harvest Capital’s head of transaction management, explained the firm’s aspirations following last month’s surprise news that its founder and chief executive officer Rong Ren had resigned. Ren is said to have had a difference of opinion with CRG regarding its strategy to expand Harvest Capital’s initial real estate focus to that of a broader, multi-sector private equity shop, and his subsequent resignation precipitated an exodus of 10 of the firm’s 36 employees within a week. 

“We’re reducing the private equity real estate to private equity,” said Yung. “Harvest Capital was built on real estate and we still have a lot of real estate-related plans going forward, but now we also have plans for infrastructure, clean energy and RMB-structured products.”

Yung noted that the organisational structure of Harvest Capital is expected to be determined over the next few months. “We have looked at and considered models such as KKR and Blackstone in terms of how to set up a company with multiple fund management businesses,” he added. 

According to Yung, the plan to expand Harvest was hatched two years ago – coinciding with the creation of China Resources Capital (CRC), the financial arm of CRG. The expansion is led by CRC chairman Jiang Wei, a highly-regarded professional among the senior ranks of China Resources, and is part of CRC’s plan to establish itself in three primary business lines: banking, trust services and asset management.

“The business of the bank is on track. The business of the trust company is, again, on track. The third business is fund management, so we are looking to build out Harvest Capital to become one of the investment managers of choice in China,” said Yung. 

Working within the conglomerate’s myriad of companies has been dedicated infrastructure and RMB teams ready for migration into Harvest Capital. Although Yung declined to divulge how much capital CRC would dedicate to the expansion, he said: “We will draw as much capital and as many resources as necessary to achieve the strategy.” Testament to that are plans for a first dedicated infrastructure fund, which is slated to launch by 2013.

Still, real estate remains firmly on Harvest Capital’s slate, Yung emphasised, adding that further products have been planned. First, however, the firm must convince the LPs of its latest commingled fund, CR China Retail Real Estate Development Fund I, that the departures of Ren and other colleagues will not disrupt the vehicle’s activities. 

Indeed, Ren’s departure triggered a key-man event, and a meeting with LPs this month is expected to culminate in a vote to decide whether Harvest Capital will continue to invest the remaining $210 million of the $466 million raised for the vehicle. A two-thirds majority is needed to continue, although Yung is confident of a positive response, given that the four projects owned on behalf of the fund are, to date, projecting returns “in line with our underwriting assumptions.” 

A parting lesson

Ren reminds colleagues to ‘treat LPs like aging parents’

It is customary for senior executives leaving their employment to circulate a parting message to colleagues and business partners. A departure from the ordinary was offered up by Rong Ren, who opted to supplement the customary ‘farewell’ note with an anecdote from an investor meeting during the early days of his seven-year tenure as Harvest Capital’s chief executive officer.

Ren wrote: “I always remember one investor meeting in New York back in 2006, when I started our first fundraising. There were four brothers in their 70s with their wives at the meeting. At the end of the meeting, one of the brothers hesitated a while and said ‘We like you and your fund, but we have no idea about China real estate. We will invest in your fund, so please take care of our money in the future’. For the first and only time, I rejected their commitment on behalf of the GP.”

Ren continued: “Out of my hundreds of LP meetings, I still remember that meeting today.  Since then, I have built up my belief of treating LPs’ capital in the same way as that of my aging parents – if I am the one raising capital, I should be the one returning it back to them. Together with my professional team, we have done that a few times now. So, when people asked me the secret behind Harvest Capital’s success, I always remember that meeting in New York. Fund managers should always remember their commitments to LPs, as well as to focus on sectors that they know best.”