China distressed fund raises $303m(2)

Shoreline Capital has raised $303 million for a China-focused special situations/distressed debt fund, almost twice the amount of its debut fund, but still below its $400 million target.

Shoreline Capital, a private equity firm with offices in California and Guangzhou, China, has closed its second fund on $303 million – almost twice the size of its $178 million debut fund that closed in 2008, according to a firm statement.

However, Shoreline, which specialises in distressed debt and special situations investment in China, fell short of its initial target of $400 million, according to Benjamin Fanger, co-founder and managing director of Shoreline.

Shoreline China Value II was launched in 2011 and marketed mostly on its own but with some help from Eaton Partners, Fanger said.

LPs include institutional investors, individuals and family offices from North America, Europe, Asia and the Middle East. Nearly all the fund’s capital came from global institutional investors, Fanger added.

One of the reasons Fund II fell short of its target, Fanger explained, was that a number of Asian funds of funds had soft commitments to Shoreline’s vehicle, but were unable to raise the capital for their own funds. China’s poor fundraising environment also took its toll, he said.

Shoreline’s focus is also very unique for China, where most firms focus on growth capital and venture investing. So far, Fanger knows of no other active US dollar fund that focuses solely on China’s distressed debt or special situations space.

“Investors are increasingly interested in credit in China, but many felt that they did not yet have a good enough understanding of it to commit to a fund,” Fanger told Private Equity International.

However, he believes that China’s banking system actually provides many opportunities for Shoreline’s funds, because the government tends to dictate exactly where bank financing should go, regardless of how credit-worthy some smaller companies are.

“China’s financial system allocates capital inefficiently, leaving many good companies without financing and bad companies with too much debt,” Fanger said in the statement. “Now that China is facing a slowing growth rate, these types of opportunities have multiplied.”

So far, Shoreline has invested one-third of Fund II’s capital in five investments, including one non-performing loan portfolio, which the firm says it bought from a Chinese bank at 5 cents to the dollar, and four financing deals involving special situations for companies that cannot get bank loans. The firm’s average investment size is $20 million to $30 million.

This new fund has boosted Shoreline’s assets under management to around $500 million, according to the statement. The first fund is now fully invested, and Fanger expects it will be fully realised by the end of next year.