Beleaguered co-working operator WeWork raised some much needed cash on Thursday when it announced that it had sold a $200 million stake in its China division to a consortium led by Shanghai’s Trustbridge Partners.
Trustbridge is taking the lead among a group of investors that will assume control of what will effectively be the WeWork China franchise, covering mainland China and Hong Kong, according to an account in the Wall Street Journal citing sources familiar with the transaction.
Disposing of control of its China business is the latest milestone in WeWork’s long march to profitability since its failed IPO a year ago, with Sandeep Mathrani, who replaced disgraced founder Adam Neumann as CEO under the terms of a shareholder bailout last year, painting the share sale as an endorsement of the company’s potential in China.
“This investment is a testament to our business and in Trustbridge we have truly found the best local partner for WeWork China’s next chapter,” Mathrani said in a statement.
Since first entering China in 2016, WeWork now has more than 100 locations across the country, however, the cost of running upscale shared offices in a developing market has weighed on the company’s finances, with a report last year indicating that the China operation subtracted 3 percentage points from WeWork’s profit margin as of last year.
The investment led by Trustbridge, a venture capital firm led by former Meituan Dianping executive Michael Jiang will help to localise ownership, and enable WeWork China to respond to local needs, and work with real estate partners to increase asset values, the statement said. As part of the deal, Trustbridge’s Jiang has been named acting CEO of WeWork China.
Under the terms of the agreement, WeWork will retain a minority stake as well as a board seat in the China operation, while licensing its name and services to the spin-off. However, it will also relinquish control of its Chinese operation, according to the WSJ account. WeWork declined to disclose further details relating to other shareholders.
WeWork is embroiled in an ongoing effort to raise capital following its failed IPO last year and to reduce lease liabilities in markets like India and China, where it has suffered low occupancy.
The China unit was officially spun off from the New York firm in 2017 when WeWork and its financial backer Softbank formed a $500 million joint venture with China’s Hony Capital aimed at expanding a business which Neumann once said would sign up a million members.
Trustbridge and Singapore state investment fund Temasek Holdings joined the trio in a $500 million series B investment in 2018, which valued the China business at $5 billion.
That deal came just three months after WeWork agreed to acquire Shanghai-based naked Hub, which then operated 26 Greater China co-working centres, for a reported $400 million, or twice the amount that Trustbridge paid to take control of a four-times larger platform today.
WeWork China is now present in 12 cities where it serves 65,000 members.
Chinese Flex Space A Long Game
Trustbridge’s investment can improve the prospects for WeWork’s growth in a market which is increasingly dominated by local service providers partnering with domestic occupiers, theorised Jonathan Wright, director of flexible workspace consulting for Asia at Colliers International.
“In the longer term it’s a net positive for the market. The deal will rebuild confidence in the brand and put WeWork on stronger footing from where they can grow again — and grow in different ways … and also to truly pivot their product to capture growing enterprise demand,” said Wright.
Co-working space is still positioned for positive growth in China, as COVID-19 has accelerated the need for greater flexibility as occupiers and landlords alike restructure their portfolios, Wright argued. “China is likely to recover and get back to work faster than the rest of the region, so the need for office space in that market is rebounding quicker.”
During recent months, however, WeWork has continued to struggle.
In the second quarter of this year the company surrendered a fourth location in Hong Kong, reducing its footprint in the city after previously abandoning new centres in mainland China.
In late 2019 and through the first half of this year, WeWork gave back to landlords nearly 300,000 square feet (27,870 square metres) of the 1 million square feet of office space that it had taken on in Hong Kong since entering the city in 2016.
With the company having suffered repeated setbacks in Greater China, Wright sees the switch to local ownership as a potential plus in dealing with asset owners in the region.
“If a landlord were looking at bringing flexible workspace into their assets, WeWork would not have been at the top of the list given the turbulence of the last 12 months,” finished Wright. “However, [the Trustbridge investment] may instil some confidence in landlords to restart that conversation, which will be key in the path to growth for WeWork China.”