China distress investor DCL launches debut US dollar fund

The GP is also in the process of raising its second renminbi fund, reaching a first close of RMB1.5 billion ($215 million) last week. It has yet to set a final target for its local currency vehicle, but the GP wants to raise RMB5 billion across the renminbi and US dollar pools of capital.  

Founded in 2015, DCL closed its debut renminbi fund last October with more than RMB3 billion in commitments. Local institutional LPs accounted for the bulk of the corpus, including insurers, endowments, fund-of-funds and academic research institutions. CDH's wealth management platform is understood to hold 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 GP invests in a broad array of credit instruments such as non-performing loans (NPLs), high yield bonds, defaulted bonds, and NPL securitizations. It also provides turnaround and restructuring capital to companies directly. Most of the underlying investments in the first renminbi fund are located in major cities such as Shanghai, Guangzhou and Suzhou, where asset quality tends to be higher..

The government is under increasing pressure to reduce the country's growing bad debt pile, which is estimated to stand at between $1 trillion and $3 trillion. Foreign investors have been building out teams in this area, expecting more sales of NPL portfolios to third-party investors by asset management corporations overwhelmed by the flow of bad debt from banks.

In addition to portfolio sales, several other initiatives have been introduced to help address the problem, including NPL securitizations and debt-to-equity swaps.  

Last year, Bank of China and China Merchants Bank became the first banks to issue asset-backed securities (ABS) underpinned by NPLs since the government halted its previous securitization program in 2009. By the end of 2016, six banks had been awarded quotas to issue NPL-backed ABS and RMB15.6 billion was raised through more than a dozen transactions. More are expected this year, given the overall quota is RMB50 billion.

DCL was among the first batch of domestic investors to acquire those assets from China Merchants Bank, and it has already partially exited those investments, generating an IRR of about 40%. The new US dollar and renminbi funds will continue exploring this field of opportunity.

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

• Topics
• Greater China
• Fundraising
• Credit/Special Situations
• GPs
• China
• Distress
• CDH Investments Management
• Shoreline Capital Management
• DCL Investments