The International Finance Corp (IFC), the private sector arm of the World Bank, has proposed an investment of up to $50 million into a special purchase vehicle (SPV) that it mulls setting up in partnership with Chinese alternative asset manager CDH Investments, it disclosed earlier this week.
In a summary of investment information (SII) on May 11, IFC said that it is considering funding an SPV, a legal entity created for a limited, specific, or temporary purpose that is typically used by a parent firm to isolate financial risk, to capture opportunities in non-performing loans (NPL) in China.
The investment is subject to approval from IFC Board of Directors. The Board meeting is projected to happen on June 18.
The vehicle, dubbed “DARP SPV,” will primarily focus on the investment and resolution of non-performing SME portfolios; the investment, greening, and resolution of distressed properties; and the development of distressed asset market in frontier regions in China, said the firm.
The total initial capitalisation of the SPV is up to $250 million, which comprises a senior tranche of up to $100 million and an equity tranche of up to $150 million, according to the disclosure. IFC proposed to invest up to $37.5 million in the senior tranche and up to $12.5 million in the equity tranche, with total own account exposure of $50 million.
Beijing-based CDH, which had over $21 billion in assets under management (AUM) by the end of 2019, will invest up to $12.5 million in the equity tranche. The rest capital will be mobilised or raised from other institutional investors.
The duo’s rising interest in NPL opportunities in the world’s second-largest economy came as China emerged as home to around $1.5 trillion of NPLs and other stressed assets in 2019, up 7.1% from $1.4 billion in 2018, PwC estimated in a market report in 2020.
The London-based consultancy remained “bullish” on the asset class, particularly given the regulatory changes last year that allow foreign investors to apply for local asset management company (AMC) licenses – permitting them, for the first time, to acquire NPL portfolios directly from the banks.
As China further opens up its NPL market, the inflows of diversified investors could change the long-time landscape, in which the country’s “Big Four” AMCs – Huarong, Cinda, China Orient, and Great Wall – hold a dominate market share. Between 2015 and 2017, the “Big Four” AMCs remained as the biggest buyers, investing at a run-rate of about $100 billion per annum, according to the PwC report.
Established in 2002, CDH started with private equity (PE) and then developed into an alternative asset management platform covering PE, real assets, venture and growth capital, mezzanine & credit, public equities, and wealth management. With over 150 investment professionals across offices in Hong Kong, Singapore, Beijing, Shanghai, and Shenzhen, the firm has backed over 200 companies, among which 70+ are listed on stock exchanges in China and internationally, shows its website.
CDH is an investor behind some of China’s biggest firms in both traditional and technology sectors, such as artificial intelligence (AI) giant SenseTime, house appliance manufacturer Midea, and dairy products maker Mengniu.