Shoreline Capital, China's largest domestic distressed debt investor by assets, is in the early stages of raising a pair of funds focused on investments in distressed debt, in what will become their largest fundraising excercise ever, according to debt market sources.
The decision to build an additional war chest comes on the heels of rising compeition from foreign money-management firms hoping to buy beaten-down non-performing loans on the cheap. Among Shoreline Capital's domestic peers and competitors, ShoreVest, a $1.7 billion distressed debt fund spun out from Shoreline, is also out fundraising, seeking to raise $750 million.
For most people, investing in financially troubled companies might not be the easiest way to make money in the wake of the 2008 global finanical crisis that forced the central banks globally to push down the interest rates to historic lows. Some fund managers, however, are finding the prospect of getting a return of 20% something hard to resist when half of the government bonds in developed markets are trading below zero.
In China, investing in so-called special situations usually refers to particular circumstances involving some types of capital restructuring, such as mergers and acquisitions, injecting new capital through private funding, while distressed debt investing generally suggests buying a portfolio of non-performing loans at a steep discount.
Shoreline Capital aims to start the roadshow for its next month, according to two people familiar with the process. The Guangzhou-based firm plans to raise $1 billion for a US dollar fund, and another $1 billion for a renminbi-denominated fund under the investment vehicle Lakeshore, which was set up in 2016, the sources said.
“Shoreline will be meeting both existing and potential investors in Hong Kong and Singapore,” one of the two people told FinanceAsia, who requested anonymity because the discussions are still ongoing.
Founded in 2004, Shoreline Capital is a pioneer in investing in China’s special situation and distressed debt market, currently managing $1.5 billion for its offshore investors, including sovereign wealth funds, endowments and family offices. The US dollar fund has an investment cycle of about seven years, with an expected return of 20% per annum.
Shoreline Capital was founded by Xiaolin Zhang and Benjamin Fanger, but the two partners decided to split in 2016. Fanger, who is fluent in Chinese, later began his own venture and brought along eight former senior staff from Shoreline.
The renminbi-denominated fund has Rmb 6.5 billion of assets under management for its onshore investors such as banks, insurance companies and trust companies. Unlike the US dollar fund, the renminbi vehicle invests over a two-year period and the expected return is about 15% per year.
“The onshore limited partners are more sensitive to the investment horizon [shorter-time period], highlighting their concerns over liquidity,” the second person said.
China’s distressed-debt market has become more commercialised in recent years. Once dominated by the big four AMCs established in 1999 to take over the bad debt from the country’s big four lenders, the market today has more than 57 regional AMCs while sales channels for bad loans now include online auctions (including a Taobao auctioneer for bad loans!), over-the-counter trades at local exchanges as well as NPL securitisation.
China’s bad debt, measured by non-performing loans and special mention loans, reached Rmb5.12 trillion ($773 billion) at the end of 2017, up from Rmb4.16 trillion in 2015, according to the China Banking Regulatory Commission. However, industry participants reckon the size of soured debt is bigger than the official number.
According to Beijing-based CICC, distressed debt in the banking system is bigger than most people suppose at around Rmb10 trillion, almost double from offical figure. The NPL rates are 4 to 6 times higher than the official numbers, the broker said.
