It is hard to believe that the strategic streamlining last month at China-focused joint venture platform Harvest Real Estate Investments (HREI) to focus on outbound capital was purely about determining the best opportunity ahead.
HREI was launched less than two years ago by Grosvenor Fund Management (GFM), the fund management arm of London-based Grosvenor, and Harvest Fund Management (HFM), China’s second largest asset manager. It had two objectives: one, to raise capital from both international and Chinese investors for investments in China; and two, to raise capital from domestic investors to deploy into investments globally through GFM’s fund network.
Since then, the venture has raised and invested domestic capital into two domestic assets valued at a combined $460 million. It raised nothing for overseas investments. So, it ultimately achieved part of one its two goals. It was this apparent failure that led the shareholders to change tack.
The consequences of not delivering Plan A have been felt across the board. For shareholders of GFM and HFM, a three-year, RMB100 million (€11.6 million; $16 million) platform investment has whittled down with little tangible product to show for it. For HREI’s team, it triggered the departures of head Rong Ren and chief capital raiser George Agethen. We may see others leave too.
For industry veteran Ren, in particular, it would seem his days as a GP have drawn to a close after a second departure from a platform following a strategic disagreement – neither of his making, it should be said. Indeed, PERE understands he may re-emerge as an LP when he does return to the market.
Meanwhile, GFM wants to persevere in its relationship with HFM in an effort to secure capital from Chinese investors for its operations ex-China. However, it is likely a raft of new appointments will be needed to realize this aim. There is still some of the original working capital left and the two assets from which to draw revenue for recruitment. Still, it is thought that no further capital for staffing is on the table.
Shades of grey
Shareholder dissatisfaction played a big part in the shift in emphasis at HREI. That much is clear. But was it justified? The answer is not black and white. Beneath the surface, there are factors to consider and questions to ask.
For one, it is worth noting the decision to switch tack happened early this year. And yet HREI’s US dollar fundraising – widely considered its barometer of success or failure – only started officially in November, so not long ago.
It was suggested that the introduction of HREI China Total Return Fund was purposefully timed to ensure a less competitive environment in which to solicit commitments. Last year saw final closings by Gaw Capital Partners, Mapletree Investments, Phoenix Property Investors and CITIC Capital, so there was a certain logic to not competing for dollars with better-established rivals.
Then again, was it wrong to wait more than a year to formally start fundraising when your sponsors have three-year expectations? No doubt that was debated. That HREI’s two RMB fundraises were not considered sufficient by the sponsors was telling.
Further, was the strategy ill-timed and/or ill-conceived? One LP that PERE spoke to turned the fund away in the belief it was promising returns too conservative for international institutions that typically expect a premium for investing in a Chinese strategy. HREI was looking for IRRs of between 14 percent and 15 percent net for investors following a strategy themed by preferred equity or debt investments. That was surely fitting with today’s Chinese property market, which is being threatened by slacking government and bank support as it is. In these cautious times, the IRRs attached to that approach seemed reasonable. And yet, as the LP said, that was not the offering some investors wanted when rivals still were peddling 20 percent.
Might we also examine the personnel and cultures involved? Two of the key executives at GFM responsible for HREI, former head Jeffrey Weingarten and Asia head Morgan Laughlin, are no longer with the firm, which almost certainly would have had an impact on its fate. Laughlin left for Pramerica Real Estate Investors just one month after the venture was formalized; Weingarten departed last June. Grosvenor is a quintessentially British outfit, yet both men are American. It is moot to cite cultural differences, but it should be noted how Grosvenor has never before entered into such a venture in its 200-year history.
One final thought. It is unfortunate that this decision might mean we will not see Ren the GP again anytime soon. Any senior figure operating in Asian private equity real estate for a decade has fans and detractors, but it is hard to contest Ren’s track record. It comprises six China-focused funds, totalling nigh on $2 billion of equity, from which three have been completely exited and have hit their 20 percent return targets.
Today’s capital markets are oversubscribing funds with comparably strong track records but ignoring completely those with questions marks at both the fund and corporate level. Strategic shifts at Harvest Capital Partners two years ago and now HREI have no doubt informed Ren’s decision to consider other roles. It is a shame to see one of Asia’s big names step back like that.
This strategic shift came with sacrifices. Hopefully, they were worth it.