The problems that beset Trophy Property Development Fund – once a landmark China-focused PE vehicle – were not surprising, with investors informed they are unlikely to see a return on investment, says real estate private equity veteran Philip Mintz.
The Trophy Property fund has all the makings of a television soap opera: two successful entrepreneurs – bound as brothers-in-law by marriage – close a then-milestone $1 billion China property fund in 2008 with money coming from US institutions, fund of funds and high-net-worth individuals worldwide.
However, it experienced a reversal of fortune when it became apparent that all the assets in the portfolio – comprising minority stakes in five Shui On properties in the mainland – would not be developed within the fund’s seven-year time-frame and the cost to build them would be higher than initially expected.
Not only did it create distress for investors, but it also caused a rift between the two brothers-in-law: Kenneth Hung, the founder of hedge fund Winnington Capital, and Shui On Land chairman Vincent Lo.
Emerging to save the day were two opposing white knights: Mintz, the former head of Asia at Warburg Pincus, and Hong Kong alternatives firm PAG.
Mintz joined Winnington in 2012 as CIO, with a mandate to help find a solution to the dilemma. In September last year, a team led by Mintz was selected by Trophy Property’s investors to take over the management of the fund’s assets – but only after fending off PAG, which had launched an 11th hour, unsolicited bid to take over the entire portfolio.
“The magnitude of the problem was probably unforeseeable and unanticipated, but the fact that problems arose is not terribly surprising,” says Mintz, speaking at the PERE Summit in Hong Kong this week.
“You had a developer (Shui On) taking a much longer timeframe... and whom I don’t think fully understood what a seven-year fund looks like. You had an investor, who had 145 [limited partners], who wanted their money as fast back as possible with as high of an [internal rate of return] as possible,” says Mintz.
“The most critical thing that happened was a misalignment between the goals of the partners,” he notes.
Mintz spun out from Winnington last year to set up Venator Real Estate Capital – a platform which manages the Trophy Property portfolio.
Venator signed a deal with Shui On in October last year that saw the fund’s minority property stakes swapped for a majority shareholding in one Shanghai residential project which is expected to be completed within the fund’s lifecycle.
“For our investors, frankly it was a no-brainer. The alternatives to the transaction were not terribly pragmatic,” says Mintz.
The fund’s 145 LPs – which include 20 large and sophisticated pensions, endowments and insurance companies – have been told that the project may ultimately lead to a negative return in capital, he notes.
To achieve par, or a small return, Shanghai residential prices would need to undergo rapid growth in the next few years, while the cost of construction will have to remain low.
“Is it possible? It’s possible,” says Mintz. “Do I think it’s probable? No.” He estimates that the current net asset value of the fund has fallen to between $750 million and $800 million.
However, he adds: “We, and our investors, feel pretty comfortable that we can maximise an otherwise untenable situation.”
Mintz envisages that Venator will continue to operate after Trophy Property’s sole Shanghai property is completed, sold and the capital is repatriated to LPs.
“We’re trying to grow the business going forward,” he says. “We’re going to do some transactions [and have] already originated a few.”
Fellow Asia real estate veteran Timothy Grady, formerly of Hong Kong-based hedge fund Mount Kellett Capital, is helping to build out Venator’s platform.
“We’ll do some [deals] with our existing LPs and possibly new LPs and see where it takes us,” says Mintz.