In China Debt Crackdown, Morgan Stanley-Backed Fund Sees Opening

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China’s crackdown on shadow banking is leaving otherwise-healthy companies starved of funding, says Abax Global Capital, which is looking to plug the gap.

The manager of debt and private equity funds, which counts Morgan Stanley as a shareholder, aims to raise money from investors later this year and lend more in China, according to Michael Wang, managing partner and president. Any such fundraising would likely exceed $235 million, the size of Abax’s last U.S. dollar fund, he says.

The firm is among a handful of debt funds looking to profit as regulators crack down on China’s $10 trillion shadow banking industry. China is one of the few bright spots in the nascent private lending market in Asia, where banks have dominated loans to companies. Worldwide, private debt has been growing, and the size of assets under management is on course to surpass $1 trillion by 2020, according to the Alternative Credit Council.

“Chinese private businesses in general aren’t supported by state-owned banks,” said Wang at Hong Kong-headquartered Abax, which has provided dollar convertible debt financing to private-sector companies in China. “Capital was scarce to begin with but there’s even less availability.”

Abax joins others such as Bain Capital Credit and SSG Capital, which raised funds last year for so-called special situations lending in the region. Such fundraising is happening at a time when the Indian government is trying to clean up banks’ balance sheets and China is allowing more companies to fail. Funds focused on private debt in Asia have raised $2 billion this year, compared with $6.4 billion for all of 2017, according to data provider Preqin.

Lending Crackdown

At the same time, some of the main lenders to private companies in China have been in retreat. The nation’s bad debt managers had expanded into such lending, but after the chairman of one of them, China Huarong Asset Management Co., was put under investigation for graft earlier this year, their appetite to provide financing has faded, according to Wang.

Wang, who is based in Hong Kong and flies to China weekly, said the firm sources deals through its network, and through partners such as Morgan Stanley and China Development Bank, which was an anchor investor in the firm’s renminbi fund.

The firm typically lends to medium-sized companies with earnings of $30 million or more, and targets internal rates of returns of about 15 percent to 20 percent. It likes companies with low leverage, and sectors such as health care, renewable energy and consumer, according to Wang.

(Updates with fund raising data in fifth paragraph.)

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