The need for non-bank lending in Asia is expected to increase as companies grow domestically and expand offshore and traditional credit sources remain tight, according to Robert Appleby, director of Hong Kong-based ADM Capital.
ADM, which started as a distressed investor during the Asian financial crisis in the late 1990s, has since become a lender to companies in need of liquidity but without access to traditional forms of finance.
“Lending to good companies that can’t get loans elsewhere is now the bulk of our business,” Appleby said, adding that since 2004, ADM has done 100 such private transactions in Asia.
China and Southeast Asia are key markets. In China, where SMEs typically cannot get bank financing, he sees opportunity in offering liquidity to private equity-invested businesses that are stuck in exit mode.
Appleby estimated there are roughly 6000 private equity deals in China and only 10 percent have been exited. In addition, China’s IPO markets have been frozen since October due to regulatory matters.
“That leaves companies with private equity involvement with no form of exit. In some cases the fund life has terminated and now you’ve got a forced seller of a significant minority stake in a private company.”
Another target is lending to mid-market Chinese companies that want to make acquisitions abroad. He cited research from JP Morgan that forecast overseas direct investment to rise 10-fold in the next three years.
The type of due diligence we do is very burdensome and extraordinarily detailed. Credit history may be checked by figuring out if the [entrepreneur] pays his electricity bills
Several other private equity firms have also sensed credit and debt opportunities. For example, last month, Olympus Capital launched a structured credit business to serve companies that don’t have access to capital; Kohlberg Kravis Roberts reportedly intends to raise a debt fund for India and Adamas Asset Management is raising a $200 million debt and structured loan fund targeting China’s SMEs.
Appleby said ADM seeks companies with a market capitalisation between $500 million and $3 billion for a deal size between $50 to $100 million.
However, the firm engages in financial engineering rather than turnaround work. “We stop short of trying to change the mechanics of the business. Operational turnaround in Asia is difficult and returns are just not there for that type of investment.”
The firm assesses “hundreds of companies a year” and filters that down to a few deals, he added.
Due diligence, which he said takes between six months and two years, is well above what is considered standard. It includes legal, financial, environmental and personal. “The type of due diligence we do is very burdensome and extraordinarily detailed. Credit history may be checked by figuring out if the [entrepreneur] pays his electricity bills.”
Collateral is used as a form of insurance in case an owner can’t pay back a loan. However, negotiation is the always the first step. In a few instances, ADM has seized assets serving as collateral, an “extraordinarily painful and prolonged process in these countries”, he said.
In 2013 and beyond, slowing growth in Asia, the buildup of bad debt held by banks and the concurrent tightening of credit will increase opportunities for non-bank lending, Appleby believes.
“We will benefit from the cleansing of bank balance sheets. I don’t believe the profligacy you see from central banks worldwide will lead to anything other than the growth of non-performing loans.“