CPP Investments sees growing private credit plays in China
The current state of China's private equity market presents attractive investment opportunities in private credit within the world's second-largest economy, according to Raymond Chan, managing director and head of credit in Asia Pacific at CPP Investments.
“The coming 12 months will be a really exciting buying window for high-quality assets,” he said at the Hong Kong Venture Capital and Private Equity Association’s China Private Equity Summit 2024 on May 20.
The opportunities arise from the current valuation gap in China’s private equity market where there is a wide spread between bid and ask prices, Chan explained.
Combined with the lack of attractive exits via IPOs, CPP Investments sees the potential to provide a dividend cap, net financing, or secondary opportunities for the PE funds to monetise these assets.
“We see a lot of players out of the market leading to reduced competitions, and we have bank retrenchment. With a very slow public market a lot of quality large corporates are not going to the public market but are seeking private credit solutions,” Chan said.
QUICK DEPLOYMENT
Given the private equity market dislocation in China, many value investors are looking into other assets to acquire, Chan said.
With more deferred timeframes for exits, some firms are instead doing strategic buyouts or mergers and acquisitions currently.
“All of this is very healthy and are encouraging drivers for the market,” Chan said.
As they need alternative sources of capital to capitalise on this market opportunity, CPP Investments is ready to extend a line of private credit over the next 12 months, although that much time might not even be needed to reach the desired deal scope.
“More interestingly we can see that we can do all this work in the coming three to six months. And that illustrates how big the market opportunities are currently,” Chan said.
CPP Investments had a total of C$590.8 billion ($433.5 billion) in assets under management as of end-2023, of which around 24% has been allocated to Asia Pacific.
The private credit investments in the region are fairly spread equally into a third in each of the China, India, and Australia markets, Chan explained.
LESS ACTIVE MANAGERS
A lot of macro headwinds are currently diminishing the appeal of investing in China's private markets.
Chan highlighted several issues: widening yields in developed markets, geopolitical tensions, rising interest rates, inflation, bank retrenchment, and challenges in raising capital.
“As a result, we see fewer [asset manager] players in the China market right now,” Chan said.
For some of those asset managers that keep active, he emphasised their focus on resilient sectors with stable income streams, such as real estate managers targeting residential and industrial assets like logistics and data centres.
Still, new managers are also joining the market, he pointed out. Overseas credit managers are adding talent in China, while spinoff businesses from private equity firms are entering the credit space.
“They go into private credit because private credit is actually delivering equity-like returns, but in a volatile market like today you have all the downside protection, you have kind of fixed income returns which I think is very good,” Chan said.
CPP Investments will be speaking at AsianInvestor's flagship Asian Investment Summit on May 23 in Hong Kong. To find out more, click here.