Fundraising highlights Asia demand for alternative credit

Bumper fundraising in a special opportunities fund’s first close this week has highlighted rising Asia demand for alternative credit.

A “mini banking crisis” in India has been cited as adding to the demand for alternative sources of credit as traditional capital routes dry up.

However, growth of regional alternative credit has been limited by difficulties in accessing collateral in many markets.

This week India’s Edelweiss Alternative Asset Advisors Singapore reached a $205 million first close of its EW Special Opportunities Fund II (ESOF II).

Nitin Jain, Edelweiss Financial Services’ CEO of global asset management and wealth management, said that the Indian banking problems had seen assets stuck on banks’ balance sheets and acted as a drag on credit growth.

That has given rise to a demand for growth capital which funds such as ESOF-II have been seeking to tap.

Jain argued that the debut ESOF – which reached a $230 million final close in 2010 after a $105 million first close – was “one of the few credit funds in the last six or seven years able to deliver returns and make exits”.

ESOF-I is understood to have achieved a 21% annualised return over its four-year life, although Jain declined to confirm this.

He sees an “18-24% range [of return] outcomes” for ESOF-II, “unless something drastically goes wrong with the country”. Final close is targeted at $400 million.

Jain explained that loans provided by ESOF-II are heavily collateralised.

Collateral is typically illiquid real estate (valued at 100% of the loan) plus listed equity (amounting to a further 100-200% of the loan), said Jain.

Rather than sell equity to a private equity firm or via an initial public offering, company promoters are seeking debt financing at a holding company level, explained Jain.

They then use that capital to buy equity in investee companies. Those companies can then leverage that equity capital to borrow more money from the banks.

After reaching first close on June 16, Edelweiss’ investment committee is already considering three deals with more in the pipeline. The deal size averages $20-25 million per loan.

Jain highlighted renewable energy as one "big area" of opportunity for ESOF-II. Darren Stone, Hong Kong-based vice president of advisory firm AlixPartners, pointed out that “India does not have a large manufacturing base so we are not seeing the same distress” as in countries like China.

“Over the last 2-3 years, a lot of our competitors have focused on real estate funds” or club strategies pooling structured credit, real estate and distressed debt, said Jain. “We like to keep our mandates specific because the risk-return profile is different.”

High real estate and infrastructure valuations are seeing institutional investors look elsewhere, observed Jeffrey Tan, life insurer Ageas' regional director for investment management and corporate finance.

Tan was discussing regional trends in alternative investment at the FT Investment Management Summit in Hong Kong on June 18.

He cited PE and private debt as areas where institutional investors are looking.

Tan’s two co-panellists also saw increased allocations to alternative credit.

Jain said that most limited partners in ESOF-I – who are “largely overseas institutional investors” – had reinvested their capital in ESOF-II.

He acknowledged that some investors had “burnt their hands” investing in India, and there are “still a few people who would like to wait and watch for another 5-6 months”. Overall more institutional investors are “scaling up their allocation” to India’s credit markets, he said.

China-focused funds are also attracting capital. Guangzhou-based China distressed debt and special situations manager Shoreline Capital reached final close of the $500 million Shoreline China Value III on June 10, for example.

Unlike ESOF-II, that fund is investing in bank paper, reflecting contrasting liquidity conditions in China compared to India. At final close, it was reported that half of Shoreline China Value III’s assets had already been invested in non-performing loans acquired from banks at below par value.

Oversubscriptions to Shoreline China Value III were allocated to a $115 million overflow fund.

"I don’t expect that we're going to see a big wave of defaults or bankruptcies in China," said AlixPartners’ Stone. He observed that recent onshore and offshore bond defaults have seen China move to the "next stage along" the marketisation path but "not yet bankruptcy".