Private equity on pause when it comes to distressed debt dealing in China

A lack of clear bankruptcy laws in China is dampening interest among international private equity firm

PUBLISHED : Thursday, 05 November, 2015, 7:16pm
UPDATED : Thursday, 05 November, 2015, 7:22pm

International private equity firms dealing in distressed debt say they’re reluctant to chase up opportunities in China until there’s more clarity on the country’s bankruptcy laws.

Oaktree Capital co-chairman Howard Marks, in Hong Kong for the AVCJ Private Equity & Venture Forum, said he will continue raising money from rich Chinese investors to buy overseas debt, even as he believes tantalising opportunities will emerge as China’s begins its debt workout.

“I think you’ll see substantial defaults [in China] because there was a lot of lending done, a lot of building was done and we all know buildings were built that weren’t occupied and it’s hard to get money out of an unoccupied building,” Marks said. “The question is what system [in China] will govern how unpaid creditors are treated?”

Marks said his company was holding back from investing more in China for the time being.

Part of Mark’s reluctance stemmed from the lack of a clear bankruptcy code in China at present.

“In America, to oversimply, when you have a bankruptcy the old owners are wiped out and the old creditors become the new owners. It’s a very dependable process,” he said.

“You’d like to have a bankruptcy code that produces the same outcome and then you’d like to have confidence it would apply.”

To date Oaktree has committed up to US$5 billion to China, as well as a minority investment in China Cinda Asset Management, one of the country’s top bad debt managers.

Marks said he hasn’t made any investments with Cinda yet.

Since 2006 China has had some laws put in place to deal with bankruptcy, but experts say they can be unevenly or inadequately applied.

New Quest Capital Partners partner Bonnie Lo said untested bankruptcy laws in China were one of the reasons foreign distressed debt investors had limited their investment activities in the country.

“If there’s a similar opportunity in the United States’ market which would generate similar returns they much prefer to invest in those markets where they know the legal code and they’ve gone through it several times,” she said.

“I think [China’s bankruptcy laws] have improved recently but having said that it’s about the execution and implementation,” she said. “It’s not a tried and tested market like western economies.”