And they lived happily ever after. Well, not quite.
But for the 100 or so investors left in the much-maligned Trophy Property Development Fund, at least they walk away from the Chinese development fund with the majority of their original equity. Things could have been a great deal worse.
For those unfamiliar with this sorry tale: Trophy was raised in 2008 by Hong Kong-based hedge fund management firm Winnington Capital, led by then-star fund manager Kenneth Hung, for a series of investments in developments by Shui On Land, the property company of his brother-in-law, Hong Kong property magnate Vincent Lo.
Corralled by a dearth of alternative options and the relationship between Hung and Lo, investors flocked aboard hoping to tap China’s growth and urbanization stories. The result was the largest private equity real estate fund exclusively dedicated to Chinese property development, with equity of more than $1 billion.
The money was deployed into minority stakes in five developments in the cities of Shanghai, Wuhan and Chongqing. The expectation was to repeat Shui On’s successful Xintiandi development in the first of those cities across multiple developments. But after two years, tensions arose between the partners as the developments took longer and cost more than originally thought. By then, the lion’s share of the capital was deployed and Trophy’s investors were effectively held at the mercy of Lo and Shui On Land. Predictably, accusations started flying about, and lawyers were appointed by fund manager, investors and developer alike.
Ultimately, a messy legal battle was avoided thanks to an accord struck between the three sides that saw five minority stakes swapped for one major stake in Taipingqiao (TPQ) 116, a development in the Xintiandi area of Shanghai, considered to be the portfolio’s ‘crown jewel’. That happened in 2014. As part of the deal, the Winnington team subsequently made responsible for the workout of Trophy, led by ex-GE and Warburg Pincus Asia real estate boss Philip Mintz, was spun out. The team operated independently before joining Apollo Global Management last year.
Fast forward to December and the fund has agreed to sell TPQ116 back to Shui On for $564 million. The money will be transferred in two tranches: $157 million this month and $407 million in December 2017. In addition to a prior distribution of about $162 million, investors will ultimately walk away with about 0.75x invested equity.
The majority of them will have to chalk this up as a failure, but not the disaster it could have been. Prior to the asset swap, the equity in Trophy was understood to have been worth as little as $430 million. The swap and subsequent stabilization of TPQ has meant investors will walk away from this, albeit limping.
Just how damaging this saga has been for China focused real estate investment managers remains to be seen. When PERE published a special report on Trophy in the summer of 2013, certain rival managers were angry that such an on-hindsight, ill-conceived vehicle would scupper their chances of raising future funds from what was a veritable who’s who roster of institutional investors. For sure, certain investors felt burnt by the experience. Even the turnaround work by Mintz and his team may not be enough to entice them back soon, particularly those which sold their positions before Shui On’s buyback was on the table.
Surely many of the 31 investors which exited their stakes in Trophy via the secondaries market to Zug-based secondaries specialist Partners Group must be kicking themselves. Some may point to their liquidity needs or the denominator effect on their portfolios at the time, but even they must be wondering whether they made the right call given the value uplift and exit that ensued.
Partners Group, on the other hand, will be feeling smug. The firm declined to commit capital when placement agent Eaton Partners marketed the vehicle back in 2008, but stayed close throughout and, having undertaken extensive due diligence already, was perfectly positioned to pounce on the discounted stock when it became available. The firm has yet to disclose its return from this exploit, but I’m confident it will be tasty.
I wrote in this column back in November 2013 about how there were no clean hands when it came to Trophy. Each side had made bad calls. But at least the investors which saw their investment through to the fund’s end, and, for their part, Mintz' rescue team and the associated advisers that were called in to deal with the mess, will feel as if much of the dirt has now been washed away.