Days after relinquishing his management and interests in Trophy Property Development, one of China’s biggest property development funds, Winnington Capital founder Kenneth Hung wrote to the firm’s approximately 150 LPs. In a letter dated September 27, the former hedge fund manager wrote to apologize to his investors and explain why things turned so sour for the vehicle. However, he also delivered a final broadside at operating partner Shui On Land, which is led by brother-in-law Vincent Lo.
One week later, the LPs received a second letter, this time from Shui On’s chief executive officer and Lo’s deputy Freddy Lee, responding to allegations made in Hung’s letter and firing a retort. PERE obtained copies of both letters.
Hung tops and tails his four-page correspondence with utterances of remorse and gestures of devotion to the investors. “It has been a turbulent few years, and I deeply regret the fund’s inability to perform in-line with our expectations,” he conceded early on the first page. “I understand your concerns and anxieties and sincerely apologize for not being able to serve you better.”
Of a resolution between Trophy Property’s investors and Shui On to restructure the fund by swapping minority stakes in five developments for a majority stake in one, as well as spinning out the platform that will manage the vehicle going forward, he wrote: “I am pleased that we have found a course of action that the majority of you support.”
The middle portion of the letter, however, pointed fingers at Shui On. Aside from blaming the global financial crisis for the fund’s “increased relocation costs” and “tight cash flows” relating to certain of the projects, he wrote that Shui On was responsible for notifying the fund of “substantial delays” in their development schedules.
Hung also accused Shui On of taking a “hostile approach” towards Winnington in forcing the firm to accept valuations, conducted by agency Knight Frank, at more than a 60 percent discount to “recent land transactions” while threatening to “walk away” from the restructuring talks if it did not comply. Describing the episode as a “bone of contention” on which Shui On wrote three “aggressive” and “defamatory” letters, he wrote: “I decided not to create further controversy by not defending myself.”
As PERE reported last month, the restructuring of Trophy Property happened despite an 11th hour offer of $430 million for the fund and its management from Hong Kong investment firm Pacific Alliance Group (PAG). One source described the approach as a “vulture bid.”
On the subject, Hung said: “When PAG, encouraged by some of the LPs, approached me for a discussion on their intent to bid for the shares in the fund, I felt it was my duty to ensure that this proposal of an alternative manner of proceeding was put in front of you.”
Water under the bridge
On October 3, Shui On’s Lee wrote another letter to the LPs and Philip Mintz, head of the fund’s new manager, Venator Real Estate, in which it described its involvement with the seven-year vehicle as “a long and arduous journey for all of us.” He expressed “delight” that a solution to the fund’s issues had been found, “with both parties entering into a mutually beneficial arrangement.”
In addition, Lee expressed confidence that the fund’s single remaining development, Taipingqiao 116, would be “quality” and that Shui On would “do our best to achieve our profit targets for the project.” According to one source, the fund’s equity, which was written down to approximately $450 million, could be worth as much $930 million, if the project’s potential is maximized.
Like Hung, Lee reserved space to fire final shots at Shui On’s former partner. Disagreeing with Hung’s market “view” and “methods used to compare projects,” he said: “We trust that Trophy Property will not lend his analysis much credence.”
In a concluding paragraph, Lee had one final dig at Winnington by emphasizing a rosier future. “We are keen to move forward with Trophy Property in the basis of a new partnership – one that is honest, transparent and based on truth, with a true sense of our alignment of interests,” he said.
After receiving the two letters, one Trophy Property investor said to PERE: “That was [Hung’s] last word. Shui On as a public company was obliged to reply, but that wraps everything up. Those notes are the past, and now we look forward.”