China’s largest private equity real estate fund is about to be restructured in a move set to bring about the end of a traumatic time for its management, its investors and its development partner.
Winnington Capital, a Hong Kong-based alternative investments firm, raised more than $1 billion of equity in April 2008 for its Trophy Property Development Fund, with the intention of profiting from minority stakes in five developments across China by Hong Kong developer Shui On Land. To this day, it remains the largest fundraise from international capital sources for a China -focused real estate fund.
However, delays and spiralling costs at the developments led to clashes between Winnington, the fund’s 100-plus LP pool – ranging from US pension plans and multi-managers to individuals from investment banks – and Shui On Land as it became evident that those projects would outdate the life of the seven-year fund and would require more equity. As the problems mounted, the valuations for the stakes reduced dramatically and, as at the end of last year, the equity of the fund was valued at just $450 million – equaling a write-down of about 50 percent on the approximately $900 million of capital actually invested.
Now, PERE has learned that an agreement is poised to be struck between Winnington, the advisory committee of the LPs and the developer to consolidate the fund’s holdings from minority stakes in five developments to the majority ownership of just one development – a large mixed-use project in the popular Xintiandi area of Shanghai. It is thought that development stands a good chance of providing the LPs a viable exit from the vehicle within the fund’s original life, although its two additional, optional years are likely to be needed to see it through.
Ownership of the remaining four stakes will revert to Shui On Land. By relinquishing these stakes, the LPs of the fund, which include TIAA-CREF, the San Diego County Employees’ Retirement System and University of Texas Investment Management, effectively have pinned their hopes of seeing meaningful equity again on one development. Nonetheless, it is thought that, once developed and sold, the property could return up to $750 million, meaning the ultimate write-down suffered would be radically reduced.
It is further understood that the restructured single-asset fund is to be managed by a new company to be spun out from Winnington Capital and led by certain of its senior real estate executives. Subject to wider investor approval and Shui On Land shareholder approval, which is expected around June, the as-yet unnamed company would assume complete responsibility for the fund.
It is thought that key to this agreement is TAN-EU Capital, another private equity real estate firm. Originally appointed as an advisor for Shui On Land, the firm played an integral role in brokering the restructuring of the fund, and it is thought that its advisory services will be retained as Shui On Land develops the Shanghai asset. Shui On Land also is being advised by law firm Paul Hastings, while another law firm, Hogan Lovells, is advising the fund’s general partner in the negotiations.
None of the parties involved would comment.