Trophy Property restructures despite 11th hour ‘vulture’ bid

The restructuring of Winnington Capital’s Trophy Property Development Fund, one of Asia’s most-troubled private equity real estate funds, has been confirmed despite a late and unsolicited takeover bid from another Hong Kong alternative investment business.

Originally attracting $1 billion of equity from approximately 150 investors in 2008 to buy minority stakes in five developments by Hong Kong-listed Shui On Land, the fund was once the largest commingled private equity fund focused on property developments in China. But spiraling costs, development delays and conflicting development approaches led to clashes between senior executives at Winnington and Shui On as well as the fund’s investors. With debts mounting to almost $300 million and the life of the seven-year fund in danger of coming to an end before any exits could be realized, the three groups engaged in a restructuring process to ensure as timely and clean an exit for the fund’s investors as possible.

PERE revealed in April that an agreement was struck to restructure the fund and its manager and can reveal now the restructuring has been ratified, with all parties voting in favor.  It sees the fund’s investments in the five developments, which were spread across Shanghai, Wuhan and Chongqing, swapped for a majority stake in one of the developments, a 968,000-square-foot residential project in the fashionable Xintiandi district of Shanghai named Taipingqiao 116. Shui On, which retains a minority stake, will remain as its developer.

Further, it sees Winnington Capital – and specifically its founder, hedge fund manager Kenneth Hung – removed as the fund’s manager. Going forward, a new platform spun-out from Winnington, called Venator Real Estate Capital Partners, will manage the vehicle. Shui On Land revealed details of the swap to the Hong Kong stock exchange today.

Prior to the asset swap the fund’s equity was written down to approximately $450 million, reflecting a loss of more than 50 percent.  However, should Taipingqiao 116 perform to plan, the fund’s investors ultimately could see returned to them, net of all costs, between $775 million and $930 million.

Although Venator will focus on the job at hand, its stewardship of Trophy Property was threatened at the eleventh hour last month by an unsolicited bid of about $430 million for both the fund and its management by Hong Kong-based alternative investment firm PAG, the owner of Japanese private equity real estate firm Secured Capital. The firm has grown its real estate assets under management valued at about $9 billion, largely thanks to its investment in Secured Capital, but it also has a presence in China and has been widely known to be keen to grow it. Nonetheless, in a vote of confidence by Trophy Property’s investors and Shui On Land in the original asset-swap, restructuring and Venator management, PAG’s bid – described by one PERE source as a “vulture bid” – was dismissed.

Venator is led by president Philip Mintz, the former Asia head at Warburg Pincus, and chairman Mehmet Dalman, who formerly was chairman of London-listed miner, Eurasian Natural Resources. Both originally were hired by Winnington Capital subsequent to the investments being made and were put in charge of a committee to help restructure the fund. That ultimately led to the creation of Venator. They have been joined by a small team of other former Winnington staffers. Should Venator succeed in returning meaningful value to Trophy Property’s investors, it would look to launch further investment initiatives for them and potentially new investors.

The asset swap and restructuring were brokered by private equity real estate firm TAN-EU Capital, which was understood to have been instrumental in reaching this solution, and various law firms. TAN-EU represented Shui On Land alongside law firm Paul Hastings. Winnington Capital was advised by Clifford Chance. The Trophy Property's original general partner was advised by Hogan Lovells, Maples & Calder and investment bank Moelis. The limited partners’ advisory committee was advised by Akin Gump Strauss Hauer & Feld.

The investors in Trophy Property vary significantly, ranging from large US institutions like TIAA-CREF, San Diego County Employees’ Retirement System and University of Texas Investment Management to multi-managers like Franklin Templeton Real Estate Advisors, advisors like The Townsend Group and even individuals from investment bank Goldman Sachs.

Nome of the parties involved would comment.

For an in-depth analysis of Winnington's Trophy Property Development Fund, click here.