Peter's Perspective
11th May 2015 by Peter Churchouse

My Top 5 WORST Investments… Number 3

It’s probably time for another in my “5 Worst Investments” series.

So far I’ve brought you #1 “A Big Loss By Neglect” and #2 “Ignoring My Own Advice“….

This tale however, begins in the Chalbi desert of Northern Kenya in 1974.

My wife and I were driving along the dirt tracks that passed for a road network in this part of the world at that time. Our eventual destination was a remote game sanctuary.

Our Volkswagen Kombi slowly lurched to a halt. We were in the middle of nowhere.

Closer inspection revealed that the gearbox was falling out of the chassis. Not ideal…

The task at hand involved crawling on my back under the rear of the van trying desperately to coax the stubborn gearbox back into place and find suitable bolts that would keep it there.

After about an hour of this, with my feet sticking out from under the rear of the van another car rumbled down the track in a cloud of dust.

The driver climbed out and I heard a familiar greeting, “G’day mate. Looks like you got a problem there.”

He was a fellow Kiwi who had been working in Africa for many years for a construction equipment manufacturer. With his help I was able to get our wagon up and running again.

The services of his workshop back in Nairobi were offered to help with a more permanent repair.

We became very good friends with him and his family.

Some years later he returned to New Zealand and started a small property business in Auckland.

The main business was to buy up older houses or small blocks of apartments to renovate and sell on. Some were targeted for eventual redevelopment.

Another part of his business was to build industrial buildings to the specific requirements of an end-user.

I was living in Hong Kong by this stage and caught up with him every time we ventured down to New Zealand for family visits or holidays.

We would always spend time driving round the city looking at real estate, talking with agents, and checking out some of his projects.

I co-invested with him on a couple of small deals.

The first was to buy space in a small very well located apartment block that he had bought and was renovating. We still have it today, and over the years have bought more units in the block.

They are great rental earners and never remain vacant for more than a few days. The old “rental investment property where people wear a suit and tie to work” venture which I frequently write about.

We did quite well.

Success gave me a bit more confidence for the next project where I joined him as a partner. We bought a couple of old colonial style houses in an up-market suburb of Auckland. These were on adjacent large sites and that was a key attraction.

The houses were run down. The tenants were students and some other rather dubious characters. But the rental income was good.

The ultimate game plan was to get planning permission to tear down these houses and build a row of very modern, high value townhouses.

This was one of those excellent “value-add” projects that I have come to enjoy doing subsequently in the real estate funds I’ve run in the past, and am currently involved with.

The likely returns looked very good indeed.

So far so good.

I was involved in the design and planning. I coughed up a bit of extra capital when needed. But I mostly left my friend and partner in charge of the day to day execution on the ground. Being five thousand miles away myself, that seemed to make good sense.

But disaster struck.

Towards the end of the construction my friend passed away. It was a huge shock to us all. Our project (along with all his other ones) was thrown into disarray.

As the dust settled my personal lawyer started to untangle my interest in our project. Everything had been done properly and above board, so I had no doubts that I would be able to get my share of capital out of the project.

My friend’s law firm was an aggressive high profile company.

I hadn’t liked them from the beginning, but it was about to get much worse…

You see, at the time a great many law firms and accounting firms in New Zealand were more involved in shadow banking than they were in practicing law or crunching numbers.

Let me explain.

Clients who had a bit of spare cash would ask their lawyers or accountants where they could invest their money and get a better return than on bank deposits. And by ‘invest’ I mean lend…

Of course lawyers and accountants typically had all sorts of other clients who needed loans to fund businesses. And it turns out my friend was one of these clients.

At the time banks really only funded large companies or residential mortgage lending.

Small companies, like my friend’s were left out in the cold. My family had also found it difficult years before to get bank funding for small business development. They usually resorted to these non-bank sources for short to medium term debt funding.

Of course, this of non-bank funding was not cheap!

And this is exactly what my friend had been doing. His law firm was more than happy to source short term, high interest rate loans to fund some of his developments. I can only imagine the fees they tacked on for this ‘service’.

I was under the impression that our joint venture project had no debt on it at all. And that was true.

But a few weeks later, my lawyers found that my late partner’s law firm had dumped a huge amount of debt on to our almost completed project THREE WEEKS AFTER MY FRIEND HAD DIED!

The project had suddenly gone from zero debt before his death, to loaded with debt. Overnight.

There had been no debt or mortgage registered against the property prior to his death.

Further digging revealed that the amount dumped on to my project was identical down to the dollar to a loan that they had registered on another industrial project that my friend had been involved with.

They simply transferred the loan from a project with a more doubtful and lengthy financial outcome on to one that was close to completion and was clearly going to make money.

What this meant was that as our deal was unwound and the real estate asset disposed of, this new “debt” repayment obligation wiped out the proceeds of the sale.

There was nothing left.

As far as I’m concerned, legal or otherwise, it was an absolute scam*. And I was its prime victim.

*To me, this seemed outright fraud on the part of the law firm. They are still around. I have no hesitation in telling this story to anyone wanting legal advice in that market. And would be quite happy to name names.

In my view they should be disbarred from legal practice.

But what’s the lesson here? Well, it’s quite simple

Any time you are involved in any kind of business venture, there will be participants who potentially have the power to create an ‘encumbrance’ (i.e. a debt or liability) against that business, and potentially against your investment.

In my experience, despite there not being any debt on our specific project, my partner had been able to somehow include our project as an asset onto which debt from his other projects could be transferred.

Although I had a lawyer and what I thought was sufficient protection, clearly that wasn’t the case.

I don’t believe there was anything ‘malicious’ about my friend’s actions, but either way he had done something without my knowledge that had created a huge liability on my investment without my knowledge.

To be honest, if my friend hadn’t passed away it’s likely I would have been none the wiser and the project would have wrapped up fine. But in life and business, the unexpected happens frequently.

End result? I lost a good friend, a business partner, and all of my capital… but I learned another extremely important (and expensive) lesson.

My advice is every time you look at a business venture, you have to ensure that your investment is protected as best you can. A lot of people focus just on the upside… the profit potential. You have to ask what can I lose, and HOW could I lose it?

And you have to assess the ability of any of those involved to create any kind of liability for either you or your investment… with bad intent or otherwise.

It sounds harsh, but business is business, and friends are friends. And maybe on this occasion, I forgot that…

Good investing,


Peter Churchouse Peter Churchouse is a widely respected analyst and commentator on financial markets with well over 3 decades residing in Asia. He spent over 15 years as Asia Strategist and Head of Research for Morgan Stanley as well as running a hedge fund.
He shares his knowledge, insight and investment recommendations through his subscription publication The Churchouse Letter, along with his free newsletter Peter’s Perspective.

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