‘Biggest Trade’ Earns 17% as Asia Funds Target Private Companies

By David Yong

Asian credit opportunity funds are topping up “outsized” returns by financing cash-starved unlisted companies as banks curb riskier lending.
Asia Debt Management Hong Kong Ltd. expects more opportunities as borrowers face capital constraints and China reins in shadow-banking risks, according to partner and general counsel Alexander Shaik. The fund, which manages $1.5 billion, has delivered an average 16.6 percent gross return since 2008 by investing in so-called special situations from Asia to Turkey and eastern Europe, he said.
“The biggest trade right now is private credit in Asia, and there are some 35 credit funds out there doing it,” Shaik said in an interview in Hong Kong on Nov. 19. “The security, the collateral, the returns and the efficacy outweigh anything you can get in the public space.”
Regulators aiming to stem failures that fueled the global financial crisis are reining in traders’ activities, prompting bankers to hunt superior returns by setting up
their own funds. Private-equity investors in distressed debt raised $3.9 billion in Asia in the year through October, according to industry researcher Preqin Ltd., or $38.3 billion since the end of 2008.
This year, ADM has enjoyed internal rates of returns of 12 percent to 30 percent from investments in at least seven Asian companies, including Indonesian food supplier PT Haldin Pacific Semesta, Shaik said.

Political Strife

“It’s cyclical, we saw a very outsized return in China after 2008 and we get 5 to 15 percent in Thailand in a market that’s still under-invested by foreigners because of the political problems,” he said. “There’s a lot of liquidity in the Indonesian market now because a lot of people are looking at it in areas such as coal, which haven’t been fully played out.”
Investors are sensing new opportunities and less competition as global banks retreat further amid legal woes and incoming stricter Basel III rules, according to Edwin Wong at Hong Kong-based SSG Capital Management (HK) Ltd., which raised $915 million for its third fund in May.
“Banks nowadays have a lot of issues regarding capital requirements and litigations,” Wong, co-founder and chief investment officer, said in an interview in Hong Kong on Nov. 20. “This is good in terms of competition because there’s less proprietary capital operating out here.”

China Stress

Unlike in the U.S. and Europe, Asian banks face a lot of structural issues and inefficient allocation of capital, denying corporates the funds they deserve, Wong said. That’s also helped shadow banking to prosper, especially in China.
“It was only in the last year or so we started to see liquidity in China becoming a bit more stressed on the ground,” said Wong, former head of the Asia special situations group at Lehman Brothers Holdings Inc. in Hong Kong. “We certainly expect to do more in China.”