China’s state-backed private equity starts a fund to buy out distressed debt, take advantage of nation’s deleveraging campaign

Citic Capital, one of the largest private equity firms backed by the Chinese state, is raising US$500 million for its first buyout fund for distressed assets in China, placing a bet on the opportunities available in the country’s campaign to shed debt.

“There are lots of good real estate projects with stable operating income, but which are sold simply because they, or their owners, have run into liquidity problem,” Citic Capital’s senior managing director Stanley Ching, who oversees the company’s real estate business, said in an interview with South China Morning Post. “We see great opportunities in this sector.”

China’s government has been arm-twisting state-owned companies and private entrepreneurs since 2017 to pare debt, in an effort known as the “deleveraging campaign” to shield the country’s banking system from the kind of financial risk that plunged the US and the world economy into recession in 2008.

During the campaign, highly leveraged asset buyers like the Anbang Group, the Dalian Wanda Group and the HNA Group were put under scrutiny for their debt-fuelled acquisitions. HNA has sold more than US$25 billion of assets including land plots in Hong Kong, office towers in New York and its stake in Hilton hotels to repay its borrowings.

Many private enterprises and state companies are embarking on a similar slimming exercise, though more discreetly, offering premium assets that otherwise would not consider selling.

The most recent epic sale was the US$7.2 billion disposal in January of two prime sites in Beijing and Shanghai by China Oceanwide Holdings Group to Sunac China Holdings, the biggest buyer of Chinese real estate when it took 43.8 billion yuan (US$6.4 billion) worth of 13 tourism-related projects off Wanda’s hands in 2017.

China Minsheng Investment Group was also forced to sell half of a site in central Shanghai to Greenland Holdings for US$1.8 billion, at a discount of about 20 per cent, due to debt repayment pressure.

Citic, the investment arm of Chinese state-owned conglomerate Citic Group, is joining a handful of funds in hunting problematic assets for profits.

Paladin, a distressed debt investor affiliated with Country Garden, China’s largest developer, launched a US$1billion special situation fund in May 2018 with Gaw Capital, targeting distressed real estate opportunities in China. In December, US private equity group Warburg Pincus said it would spend up to US$5 billion on distressed property in partnership with Beijing-based conglomerate Hande Group.

Citic Capital is experienced in acquiring distressed assets and turning them into profitable projects, Ching said. What differs this time is the special fund dedicated to this approach, an indication of the growing prominence of the strategy.

Unlike foreign funds, who predominantly acquire non-performing asset portfolios through Chinese bad asset-managers, Citic will source the assets independently, and invest directly by purchasing stakes in those individual projects.

“We have the manpower and execution capability to source projects alone, and deal with the often complex debt structures inherited in those assets,” Ching said.

Besides the distressed asset fund, Citic is also about to close its 3 billion yuan shopping centre buyout fund, which had targeted three malls in China. It is also scouting opportunities in China’s senior-care and living facilities as well as warehousing sector.

“China is the world’s largest country in terms of property investment, and will surely become the country with the largest asset management industry, even though for now its capital account is not fully open. It is an exciting place to be,” Ching said.