Shoreline spin-out DCL raises $500m China distress fund

About one third of the corpus was raised through CDH Investments' wealth management platform, according to a source familiar with the situation. As a result, CDH took a stake in the GP, although DCL is run by a separate team and has a separate strategy to CDH's core private equity business.

The fund comes on the back of growing investor interest in special situations opportunities in the country - with various regional and global players looking anew at the market. The government is under increasing pressure to reduce corporate China's growing debt pile, which currently stands at approximately $18 trillion. The most recent initiative involves converting debt to equity.

"We estimated that there would be RMB5 trillion [$742 billion] in non-performing loans (NPLs) in China's banking industry. It is the best time for distressed investors to seek new opportunities," Selina Zheng, CEO of DCL, told the Shanghai Hedge Fund Association. "Our activities range from investing in a broad array of credit instruments such as NPLs and high yield bonds to providing capital in special situation such as restructuring and rescue financings."

The seeds of the current bad debt investment opportunity were sown seven years ago when the Chinese government sought to assuage the impact of the global financial crisis by initiating a RMB4 trillion (then $586 billion) stimulus package and instructing banks to issue loans as fast as they could.

The credit boom subsequently came to a halt amid slower economic growth and credit tightening, creating a host of soured loans as borrowers failed to make good on their repayments. China's asset management corporations are buying discounted portfolios of NPLs from the banks, but the volume of bad loans is so large that they are expected to sell on a portion to third-party investors.

Foreign private equity firms have historically struggled with NPL investments - most debts were not secured by assets that could be liquidated and they often involved state-owned enterprises or companies that had ceased operating. As a result, a number of regional special situations players have focused on restructuring companies that are at the brink rather than resolving debts against groups that have already slid into default.

Shoreline was the exception, closing its third fund at $500 million in mid-2015. By the final close, 70% of the corpus had already been called, most of it for NPL deals. "What was in question a year ago but no longer is in question is whether Chinese banks would recognize and sell their NPLs en masse," Ben Fanger, the firm's co-founder, told AVCJ at the time. He added that the first deal, worth $150 million, came the previous December, and was followed by several other large transactions.

However, Shoreline was thrown off course earlier this year as a result of strategic differences between Fanger and his co-founder Xiaolin Zhang, The Financial Times reported in June. While Fanger wanted to raise another US dollar-denominated fund, Zhang was keen to branch into the renminbi space. Fanger departed in June, by which point several other investment professionals had also left.

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• Topics
• Greater China
• Credit/Special Situations
• Fundraising
• Renminbi fund
• China
• Shoreline Capital Management
• Distress