The landscape of private credit deal sourcing in China is undergoing a transformation, as Evergrande's $300 billion default and subsequent property reforms drive lenders to seek alternatives to traditional intermediaries, according to Colin Chau, chief investment officer at Plutus Asset Management.
"Sources come from all walks of life," Chau told the audience at FinanceAsia’s 6th China Fixed Income Summit on November 27.
"A lot of referrals now come from second and third-tier accounting firms because these business owners, being non-SOEs, find it difficult to secure liquidity at reasonable pricing. That's where we come in as an advantage."
This evolution aligns with the broader growth of the global private debt market, which will expand from its current $1.5-1.7 trillion to approximately $3.5 trillion by 2028-29, according to recent BlackRock estimates following its acquisition of Preqin.
EMERGING INTERMEDIARIES
"The China market has been a slow starter compared to the rest of the world," Chau said.
Plutus Asset Management
"But investors aren't getting good interest rates from banks or other lending opportunities, so if we can invest in a safer manner with meaningful asset valuations and safe liquidity, these are very good opportunities."
The transformation of deal sourcing has created new opportunities, particularly in the wake of recent market reforms.
For family offices like Plutus, recent policy changes in China's property sector have unlocked new lending opportunities that were previously inaccessible.
"The government's policy allowing people to switch banks for mortgages this year has provided a fantastic opportunity," Chau said. "As investors, we can now assess which properties are feasible investments."
For investors seeking exposure to Chinese private credit, the returns remain compelling despite being lower than other markets. The risk-adjusted return profile has become increasingly attractive as traditional investment channels offer lower yields, he added.
"We're looking at yields of seven to eight percent. While that's below what you see in the United States, the credit spread is actually bigger in China," Chau said.
The evolution of the market has also benefited from a maturing private equity industry that provides additional due diligence support.
"Over the past decade, we've seen many more successful private equity fund managers emerge. This talent pool allows us to rely on third parties for investigations and risk-reward assessments," he said.
UNICORN OPPORTUNITY
A significant new source of deal flow is emerging from China's technology sector, opening up opportunities that blend traditional private credit returns with potential equity upside.
Family offices are particularly well-positioned to capitalise on these opportunities due to their flexible investment mandates, according to Chau.
"In Hong Kong and Greater China, we're seeing many unicorns with regular liquidity needs," he said.
These opportunities often arise from temporary financing needs that can evolve into broader investment participation, creating multiple return drivers for investors.
"When we lend money for temporary usage, we often secure additional upside potential. Beyond the steady cash flow, we can get unexpected returns when companies exit or complete their next financing round," Chau said.
REGIONAL CONTEXT
Atiya Habib, head of credit at Dinimus Capital, offered a broader perspective on the transformation of China's private credit market, suggesting the market is following patterns seen across Asia, though with distinct characteristics.
Dinimus Capital
"Private debt is used in a very broad brush manner, but it is a very different and diversified pool of lending," Habib said on the same panel.
"It could range from heavy, long-duration infrastructure debt to short-term working capital trade, like 90-day paper."
The approach to risk management also differs significantly from traditional lending.
"We get monthly reports and our investment team sits with the CFO and CEO almost on a four to six week cycle," Habib said, contrasting this approach with traditional bank lending where reviews might only happen annually.
"Looking at the bank to non-bank lending ratio, the US market is at a very mature cycle with around 75% private lending. In Europe, it's anywhere between 40 to 50%. When you come into Asia, that percentage drops to below 10%," said Habib.
While this suggests significant growth potential, Habib emphasises different success factors compared to those highlighted by Chau.
"There's a misconception that because the wave is moving from public to private, all managers are the same," she cautioned.
"If the manager hasn't worked through the GFC, Covid, currency crisis, and shown that track record of preservation of capital, there should be questions."
Her experience in the Australian market, where private credit has gained significant traction, suggests that Chinese investors' growing interest in the asset class reflects a broader regional trend toward alternative lending sources.
However, she noted that success in this evolving landscape requires both local market understanding and proven crisis management capabilities - factors that align with Chau's emphasis on building reliable intermediary networks.
"When it comes to Asia, private credit means different things to different people," said Habib.
This article wa first pubished in FA's sister publication AsianInvestor.
