ASIA NEWS: China cash trap

After a protracted period of uncertainty, things are finally coming to a head for the various parties involved in China’s largest private equity real estate fund.

Hong Kong-based hedge fund manager Winnington Capital had hoped to establish itself as a private real estate investor when it brought the $1 billion Trophy Property Development (TPD) fund to the market in April 2008. The vehicle planned to invest in four masterplanned developments across Greater China by blue-chip developer Shui On Land.

But it has since found itself at loggerheads with the developer and, subsequently its investors, after it transpired the developments would require more time and capital than originally predicted. 

The list of those with equity caught in the fund is extensive. The LPs range from TIAA-CREF to San Diego County Employees’ Retirement System, University of Texas Investment Management Co, Franklin Templeton Real Estate Advisors, and even wealthy individuals from investment banks.

Their interest was understandable given China’s growth, and they were wooed by the prospects of investing in projects by the developer behind Shanghai’s famous Xintiandi shopping and entertainment district. Indeed, by suggesting returns were possible of 25 percent and a 2.5x equity multiple on investments, Winnington had no problem surpassing its original $750 million fundraising target. Investors were also comforted by the strong personal relationship between Winnington owner Kenneth Hung and Shui On chairman, the famous Hong Kong property magnate, Vincent Lo.

However, their capital was invested in minority stakes in the developments, giving them little say over resolving unpredictable issues such as spiralling resettlement costs for families.

When it became clear the developments would suffer delays and outdate the fund’s seven-year life, even allowing for its two one-year extensions, the relationship between Winnington and Shui On Land is said to have deteriorated. 

Amid the troubles, the fund’s original chief executive officer, Eddie Wong, left in October last year. Wong became Winnington’s CEO in 2005 having previously been chairman for Asia at HypoVereinsbank (HVB). With a small fortune personally invested in the fund, Wong has joined the multitude of investors unable currently to realise an exit from the fund. 

One person familiar with the situation said: “Until the land is built and disposed of, they can’t get money out. They’re in a cash trap.”

PERE has learned, however, that Winnington and Shui On appointed advisors in the summer in an effort to resolve the situation. The aim is ultimately to restructure the capital invested by the fund so the investors can achieve a viable exit. These negotiations are understood to have progressed over the last few months and, mindful of time running out, the parties are aiming for a concrete resolution by year-end.

In whichever way the investments by TPD are restructured, onlookers predict it will result in a dilution of the fund’s stakes and, consequently, larger stakes for Shui On Land, which has a strong balance sheet and could even tap the public markets if necessary. 

Furthermore, Winnington is in debt to Shui On Land, which has continued to finance the developments now that TPD’s equity is completely invested. The amount that Shui On Land has invested on behalf of TPD is understood to total nearly RMB2 billion (€250 million; $320 million) and that figure is expected to grow further.

Nevertheless, Shui On is not keen to see Winnington’s investors suffer losses. Though it has no obligation to the fund, given the partnerships were struck at the asset level, the developer is understood to want to grow its relationships with its investors with a view to working with them again in the future.

Despite the delays the fund faces, there is confidence the developments will be strong performers in the long run. “They will be profitable,” said one investor, “but it’ll take too long. Some of the investors don’t have the additional capital or time.” 

But he added: “There is no point in fighting about it.”

A solution reached by the end of the year would demonstrate the parties involved with China’s largest private equity real estate fund can agree, in spite of all the strained relationships. Whether limited life private equity real estate funds are used for minority stakes in large-scale, masterplanned developments in China again is another matter entirely.