ASIAVIEW: The house always wins

This month’s Asia news section is unapologetically focused on private equity real estate in China. Why? For one, seven of our website’s 10 most-read stories in Asia last month were focused on events taking place in or related to the country.

Atop the list, predictably, was Garth Peterson’s guilty plea in a New York court for his role in a conspiracy to evade Morgan Stanley’s internal accounting controls in order to enrich himself, a Chinese government official and a Canadian lawyer. His actions between 2004 and 2007 – and their ramifications – have been widely reported since the firm instigated an internal investigation at the start of 2009 and have been the subject of one of the sector’s most intriguing episodes. 

Further hooking the eyebrow of readers was the dramatic resignation of Harvest Capital Partners’ founder and chief executive officer Rong Ren and the ensuing revelation that his departure was a consequence of the firm’s ambitions to morph from a real estate-focused outfit to a multi-sector private equity giant. Apparently, there was a difference of opinion regarding the strategic direction of the firm between Ren and the powers that be at Harvest Capital – its now 100 percent stakeholder, state-owned conglomerate China Resources Group.

Senior changes at Harvest Capital’s Hong Kong neighbour Winnington Capital also grabbed readers’ attention. While the news there was the assumption by founder Kenneth Hung of the chief executive officer role and the appointment of Philip Mintz as its new chief investment officer, the appointments brought to light further background into the tensions at the group last year that led to chief executive officer Eddie Wong parting company with the firm. Again, there was a difference of opinion regarding the strategic direction of the firm between the CEO and the powers that be.

So what is the common thread between these three Sino-centric tales? Simply put, these are three examples of victory for the establishment over the individual. In addition, they represent three examples of individuals accepting their fates quietly. 

It is clear from interviewing people familiar with Harvest Capital and its founder Ren that the man, who built a platform with approximately $6 billion in assets under management and a staff of 36, did not expect when setting out to be asked by his sponsor to become one head among many as it bolted on infrastructure, clean energy and other private equity sectors to the initial real estate thesis. However, when China Resources Group wants something to happen – as with its own parent, the Chinese government – it happens and happens quickly. It was astonishing how speedily 36 staff became 26 within a week.

A possible hint into how Ren regarded his resignation comes in his somewhat unusual parting letter to colleagues and partners. In the letter, and via an anecdote relating to an early investor meeting, he stated: “If I am the one raising capital, I should be the one returning it.” 

Was that a discreetly-positioned utterance of regret by Ren for not being able to be the man to return the capital of Harvest Capital’s live fund, the half-spent CR China Retail Real Estate Development Fund I? The fund closed on $466 million in commitments and still is approximately 45 percent uncalled. By the time Harvest Capital harvests the fund’s properties, Ren and certain firm alumni are likely to be concentrating their efforts elsewhere under another sponsor.

Winnington’s Wong, meanwhile, was a close friend of founder Hung before he was hired in 2005 to lead the hedge fund-cum-private equity real estate firm’s funds. One LP in the firm’s maiden fund, the $1 billion-plus Trophy Property Development fund, described how they even ran a restaurant together. “It was a messy divorce between two friends” he said. Only in this instance, one of the friends owned the establishment, so the establishment prevailed. 

Like Ren, Wong would have wished for a different outcome. PERE understands from one source familiar with the ex-Hypo Vereinsbank chairman that, while Wong disagreed with the actions of his former employer, he was more keen to ensure there was little visible disruption to the fund and for its LPs – of which he now is one, given his principal co-investment.

Neither Ren nor Wong was happy to leave, yet both went quietly while their firms look forward, reproach-free. Does this say something about Chinese business ethos? Accepting that every scenario is subject to its own circumstances, perhaps it does. Nonetheless, in both situations, there’s a dichotomy of views, albeit perhaps with a little wider sympathy for the individuals involved.

How much sympathy there is towards Garth Peterson, the wayward ex-managing director of Morgan Stanley Real Estate Investing, is another matter. As he faces his penitentiary and pecuniary fate next month, few would deny they were satisfied that the establishment – Morgan Stanley and the US government – prevailed in this instance. Circumventing controls to steal is never acceptable. 

The house always seems to win, but that’s not always a bad thing.