Last month, Partners Group, the Zug, Switzerland-based private markets investment manager, completed one of the highest profile private real estate investments in China so far this year. Yet, speaking about the outlay shortly afterwards, the firm made it clear the investment was not a “bullish call” on the Chinese market. Moreover, this was deal was about the “pricing point”.
In a rare-publicized secondary transaction, Partners acquired 12 percent of the units of the troubled Trophy Property Development fund, a vehicle raised by hedge fund firm Winnington Capital in order to buy minority positions in five residential-led development projects in the Chinese cities of Shanghai, Wuhan and Chongqing by the Hong Kong-listed property company, Shui On Land.
The fund closed in 2007 with $1 billion of commitments from 145 investors ranging from sophisticated US investors to wealthy individuals from investment banks. Winnington and Shui On fell out after it became apparent the developments would be delayed and costs would spiral and that precipitated the appointment of advisors who negotiated a restructuring of the fund, an asset swap and a management spin-out that was agreed at the end of last year. By then, the value of the fund’s equity had been written down by more than 50 percent to approximately $450 million.
The asset swap component of the transaction is expected to complete in the third quarter this year. It will see the minority stakes swapped for one majority stake in a 968,000 square foot development in the fashionable Xintiandi area of central Shanghai named Taipingqiao 116.
Bastian Wolff, Partners’ head of real estate in Asia, would not reveal the price paid for the units. But he confirmed the firm’s investment was agreed at a further discount to the adjusted valuation. He said: “For us, the entry point at the pricing at which we could buy this provided a rare opportunity to access one of the most prime residential developments in Shanghai.” Fabian Neuenschwander, the firm’s head of real estate secondaries, added: “We believe we have come into the fund when a lot of the risk that we had initially been concerned about has been taken away.”
Partners’ executives revealed they had been monitoring the Trophy fund since its inception and undertook “extensive” due diligence when it was on offer as a primary fund investment. “But we didn’t make a commitment,” said Wolff. “The original proposition was very interesting but the fundamental issue was the timeline of the projects. But project a longer term on this asset and it has value. In hindsight that was a fair projection.”
The 145 original investors were not so fortunate. Trapped in a written-down investment until the restructure, in an announcement on the transaction, spun-out manager Venator Real Estate Capital Partners said the restructuring offered them their first “liquidity window”. In selling to Partners, 31 of 40 investors that registered their interest in getting out took advantage of the escape route. Further windows might be facilitated in the future, and Partners, now the second biggest investor in the fund, might buy again.
Another investment would again be predicated on pricing. As Wolff said: “We are not making a bullish call on the Chinese residential market.”