August 13, 2014
Interviewed by: David Snow
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Chinese GPs Eye Credit Strategies

Two credit investors in China and an expert from EY describe why so many Chinese GPs are now looking at expanding into credit strategies.

Two credit investors in China and an expert from EY describe why so many Chinese GPs are now looking at expanding into credit strategies.

Chinese GPs Eye Credit Strategies

Private Capital in China

David Snow, Privcap: We’re joined today by Rob Petty of Clearwater Capital Partners, Ben Fanger of Shoreline Capital, and Bob Partridge of EY. Gentlemen, welcome to Privcap. Thanks for being here.

Is it safe to say that many firms that started life as regular way private equity firms are now more interested in expanding into credit?

Ben Fanger, Shoreline: In the last two years I have seen over a dozen different groups… Actually, at one of the largest private equity firms in China five or six years ago, one of the managing directors who’s somewhat of a friend said to me in Chinese, “You guys make sweat money, you guys make bitter money”—we make the easy money over here to doing pre-IPOs. That same investor today is trying to get into our space because the pre-IPO strategy, as Bob labeled it—which is not a strategy but a play on a certain market—is not sustainable. Now they see this whole private credit opportunity and the kind of returns Rob was talking about and they want to get into it.

Bob Partridge, EY: As for what we’re seeing, I’d echo what Ben said. The more seasoned players, those with the better track records (and frankly, the ones not as troubled with fundraising) are looking at more ways to deploy more capital. I don’t think they’re seeing credit opportunities as a way to replace the traditional common equity, private equity investing. It’s an extension of a platform where if they’re able to source, originate opportunities, how do they deploy more capital in different ways?

Rob Petty, Clearwater: David, the way I see other players in the space—it’s almost worth thinking at the Pan-Asian level. Large, successful private equity firms are thinking about expanding their brand and the scale of the credit markets in Asia, especially in China, are large enough that they’re all thinking about and, in some cases, executing a plan to participate in private credit. That’s particularly relevant and specific to China around this evolution of the banking system. So, precisely due to the asset management opportunities people are looking at and this enormous $20-trillion credit market has got people thinking that China might be the first place they practice that.

As you rightly said, the opportunity is quite interesting. The legal system has developed such that there are more tools. Practitioners have gotten more experienced in implementing more operating tools across the strategies and there’s more money to maybe think about putting credit as part of what you do in China or Pan Asia.

Fanger: I would say that most of those Pan-Asian global groups or even local Chinese groups that are adding it on as another strategy to an existing platform have never been to a court in China. They have never owned one, let alone thousands, of loans; they have never structured a privately structured financing on the credit side. So, what will determine whether they can be successful at that? Actually, you’re looking at the only two people I know of who still exist that have done MPLs and have been in courts in China and still manage a private equity fund. So, if everything goes well, you invest in a bunch of loans, none of them default, and then that’s fine. But, if things don’t go well, particularly in a decelerating environment where you have increasing distress and asset values declining and things like that happening, there will be losers in that situation.

Snow: There will be bitter lessons learned?

Fanger: Yes.

Partridge: Ben, you hit a good point. These guys are expanding into things. It’s even worse when they don’t recognize they need to operate differently to extract favorable returns on credit versus common equity. As you see them crossing platforms, that’s probably the biggest risk out there.

Fanger: Some will be successful, but …

Partridge: Some will, but where they’ve got the institutional knowhow, they might bring that to bear. At the detail level, at the bootstraps on the ground, without people who really know how to do it and recognize that operating in a distressed credit environment is very different from a growth capital mode, they’re going to create some fallout.

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