Q&A: Clearwater Capital Partners' Robert Petty

Q: What patterns have there been in Clearwater's investment strategy in the last five years?

A: If you look at opportunity sets post-global financial crisis, we have consistently remained contrarian in Asia and the strategy continues to perform well for us. Two years ago I stood on stage at the AVCJ Forum and said India was an interesting market; that was a counter-cyclical, contrarian theme. We were doing well-underwritten, interesting deals at a time when no one wanted to do them in India and they have proved to be compelling investments, such as Jaiprakash Power and Suzlon. Volatility continues to be a dominant theme in Asia and that creates opportunities. Just look at the volatility in China's stock markets in the last 3-5 years or more currently into the end of June. Being contrarian across Asian economies, industry sectors and macro environments has generally allowed consistent, interesting valuation entry points, while creating steady portfolios and, equally interesting, exit opportunities into the volatile upswings of the markets.

Q: What has been the impact of slowing growth in China on investment opportunities?

A: While there is a slowdown in China, that has created greater opportunities for businesses that are still making money. A non-growth, stable business is actually a very good lending client and customer at a time when there are fewer lenders and banking institutions are more risk-adverse. In terms of amount of activity and dollars invested in China, our main focus has been on direct lending, with some offshore stressed situations. We participate in onshore direct lending investments, through our two China platforms and provide loans or structured investments that enable us to make investments offshore. For individual credit, we find both the onshore and offshore markets increasingly deep, diversified and growing.

Q: To what extent do you face competition from the shadow banking?

A: What is shadow-banking? It's non-bank lending. If you are doing solid, well-underwritten transactions onshore then you are participating in non-bank lending, and it is useful for any economy. We are proudly doing this. A large percentage of the lending markets in the US and Europe - over 25% - is non-bank, which means getting capital to small and medium-sized enterprises and to parts of the economy the banks don't serve. The Chinese credit market is worth $20 trillion today and clearly direct lending will continue to develop as it has in the US and Europe. It makes sense for the economy and therefore the scale and sophistication will continue to grow.

Two years ago I stood on stage at the AVCJ Forum and said India was an interesting market; that was a counter-cyclical, contrarian theme

Q: Do you invest in non-performing loans (NPLs) in China?

A: We can and do invest in NPLs but we've found it less opportunistic for us than investing in performing businesses generally. We find dealing with large businesses that are cash flow positive, can deliver a more stable and consistent return profile. Realizing 10 or 20 cents on the dollar through a legal court process is painful, and uncertain in terms of timeframe. We would much rather lend to the number five player in an industry that is having a weak quarter or year but still makes money.

Q: How does Clearwater's China strategy compare to India?

A: It is a very similar core underwriting thesis, there are similar structural enhancements, but very different cultural approaches. The two markets are 10 years different in scale and maturity. For example, property developers in China have a 10 million square meter development track record; whereas in India, you are large if you have executed two million square meters.

Q: You said that Clearwater has benefited from its contrarian approach to India. Can you give an example of this?

A: We are participating in the Suzlon Energy restructuring - it is one example of a market that has turned around, both the economy and the industry, during this period. Two years ago renewable energy businesses were in great difficulty. Under the Narendra Modi regime they received a reboot and these businesses are now profitable and fundamentally turned around. Suzlon has been fully restructured, sold a business in Europe for a $1 billion and its stock price has risen considerably.

Q: What sectors, throughout the region, are you most interested in at present?

A: We are looking at industry sectors that are facing cyclical challenges today, such as oil and oil services, and businesses in sectors that are facing difficulties, particularly those that are commodity-related. In Singapore we have found some opportunities in hard assets such as oil services and shipping related assets. It is more direct lending than stressed situations - real businesses with assets you can lend against that have gone through difficulties and earnings have fallen by half. In Australia we also like the opportunity set in mining services, and with the consolidation of core businesses we are focused on those companies who will be survivors. This cycle may or may not be different to the last one. Is the economic rebound globally going to be as fast as it was in 2009-2010 and is China going to be as strong a commodity swing factor as it was at that time? We are thoughtful that China may be a more steady-state consumer of coal than it was before.

Q: You previously invested in Griffin Coal in Australia. What are the key considerations in these kinds of deals?

A: It was a classic distress situation - the company defaulted and the creditors foreclosed the business, ran it through the receiver, including providing a dip financing, and then sold it. We are seeing selective opportunities to do that in the commodities downdraft. But I would say you have to be very thoughtful about your exit scenarios in any of those businesses. They are easy to enter but you have to look 3-5 years forward in terms of the exit environment. Griffin was bought by an Indian coal company. We underwrote the business such that it was a very low entry price into a coal mine and provided a more than 2x multiple as investors in a senior debt instrument.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

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