PAG shows appetite for distress

It comes on the heels of reports, also confirmed by AVCJ, that specialist distressed investor Clearwater Capital Partners has so far raised $200 million for its fourth Asia ex-Japan fund, with a final target of $900 million. Clearwater Capital Partners III closed in July 2007, also at $900 million. It was the sixth-largest regional (as opposed to country-specific) distressed vehicle ever raised and, between then and last week, only two funds had managed to close above the $100 million mark.

The objective is to capitalize on opportunities in distressed credit and arbitrage across the region. For example, it is estimated that $23 billion worth of Greater China IPOs have been put on hold since mid-August, which means a host of fast-growing companies might be looking for capital to tide them over..

PAG's debut Asia special situations fund doesn't represent its first foray into the asset class. The firm's absolute returns team has been making distressed investments for some years through the Pacific Alliance Asia Opportunity Fund. The vehicle, which closed in September 2006 at $275 million, participated in buyout, PIPE, growth and mezzanine/pre-IPO deals. Pre-IPO investments included Xinjiang Goldwind Science & Technology and Sino-Ocean Land Holdings.

The special situations fund has a more focused remit, the source tells AVCJ. Its targets include credit and equity special situations, distressed opportunities, single credit investments, primary credit and refinancing, and portfolio acquisitions.

The LP base is small relative to most similar-sized private equity firms. The source describes the LPs as "very international, highly sophisticated investors, including one sovereign wealth fund."

It is difficult to express the scale of distressed opportunities in the region. One IMF projection puts the value of outstanding corporate debt in Asia ex Japan at $19 trillion; others are much more modest, with one long-term regional distress player estimating $4-8 trillion. Another way of assessing the magnitude of debt outstanding is to consider growth net new lending: China and India have seen compound annual growth of 20% over the past five years, while in the US and Europe it has been flat.

"Finally some of the cracks in the lenders' balance sheets are beginning to show. We think the number is maybe $500 billion region-wide," Rob Petty, Clearwater's managing partner and co-founder, told AVCJ in August. "So the credit markets are big and getting bigger, while there are fewer players. Also, like any lending market, there are people who make mistakes: therein lies the opportunity."

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• Topics
• Credit/Special Situations
• Fundraising
• GPs
• PAG
• Fundraising
• Distressed
• Clearwater Capital Partners
• Robert Petty