Q&A: Clearwater Capital Partners' Rob Petty

Q: You closed Fund IV last May. How far deployed are you?

A: We have been cautious over the past nine months given the very low rates in the market. However, we built a book prior to that and just did a 15% draw, taking us to over 50%. Keep in mind we recycle our capital twice - so if we buy a pool batch of loans, when they are repaid, or sold, the capital goes back into the fund.

Q: How has the investment climate changed?

A: The credit markets of the past nine months are no longer relevant because what has happened in the markets in the past 4-6 weeks has created an entirely new opportunity set. Simply put, emerging markets have seen $19-20 billion in withdrawals from the more conventional allocators. With volatility in the fixed income market and in the credit markets overall, plus dramatic declines in public market valuations, the credit lending space in Asia has become more interesting. Chinese property developers were able to issue public bonds but now those deals are down 10-15 points. We are their alternative source of financing - and we work at more logical lending rates.

Q: How significant are Chinese developers as clients?

A: They are the single largest borrower in Asia, accounting for 35% of the public bond indexes, but there are only about 40 companies that can get financing offshore. There are 50,000 developers in the onshore space, and that whole middle tier is our single most prolific and exciting opportunity set. We are very focused on the onshore senior secured lending space in China, and in India as well. This has received a lot of attention in China under the broad moniker of shadow banking. There is an opportunity for best-in-class practitioners to lend appropriately in the shadow banking world while regulators squeeze out those who are operating inappropriately. The way this is playing out in the financial markets has been interesting for the last six months and it will remain interesting for some time.

Q: You and numerous others operate onshore in India through a non-banking financial company (NBFC). Is this arrangement more formalized compared to onshore lending in China?

A: You can get licenses to lend in China so I think there is the same formalized regulatory environment. However, people might be a little more competitively quiet because it's harder to do in China and they don't necessarily want to describe in public their lending structures, whereas in India it's pretty easily findable.

Q: The underlying thesis for this business is that smaller companies in China can't get bank financing. Presumably this won't change for a while...

A: Therein lies the opportunity for PE and private lending broadly. In all emerging economies that have state-dominated banking systems there is a huge array of opportunity in terms of absolute growth of those economies and growth in lending needed by companies.

Q: To what extent are you taking advantage of the fact that many entrepreneurs prefer debt financing because they don't have to give up equity?

A: For entrepreneurs, it's really a choice of how they want to finance growth. We are a lower cost sponsor - in that less equity is coming from their personal pockets - and at the same time we have a more guaranteed return component. We like to enhance our returns with an equity kicker, but we don't have to; many of our deals are senior secured without an equity kicker. Entrepreneurs also like us because, much like a PE firm, we can help their companies grow.

Q: Moving from growth-oriented debt financing to restructuring, where do you see most opportunities?

A: It's more of a sector play. For example, the cement industry is going through a consolidation and the shipping industry is seeing systemic change. We have also been involved in some agri-businesses that have gone through long-term difficulties with their capital structures.

Q: What is your capacity for these deals given the amount of time and resources required?

A: In terms of a full-on transaction, it's 1-2 a year. Deals generally come out of industries where we have been active on the credit and lending side. We might do lots of lending in natural resources and through that we get excited - or not - about a potential restructuring. You have to be very careful about saying no, because many restructurings can't necessarily be done. We try and build a diversified portfolio of steady eddies along with those that can be our most lucrative transactions.

Q: Can you give an example of a restructuring that was successful and what was required to make it so?

A: Griffin Coal [a distressed Australian miner] was an approximately $100 million deal out of Fund III. We took control of the business, put in a receiver, worked with the unions that supported us and the government, and dealt with a host of operational issues with the creditor group and KordaMentha. We put in new money to keep the business operating for 19 months and sold it two years later for a 2x return. Those two years were pretty intense.

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• Topics
• Restructuring
• Financing
• Credit/Special Situations
• Greater China
• South Asia
• Clearwater Capital Partners
• Structured finance
• Distress
• China
• India