From Chicago to China

Benjamin Fanger and Xiaolin Zhang met as MBA students at the University of Chicago. They’re now scouring the NPL portfolios of China for value investments. By Aaron Lovell.

Shoreline Capital was hatched in a café near the University of Chicago when Chinese real estate developer Xiaolin Zhang and entrepreneur Benjamin Fanger met to discuss assets in China. Both were working on MBA degrees at the school at the time. (Fanger was also obtaining a law degree.)

“We both felt value investing is the way to go—particularly in a situation with a lot of inefficiencies,” managing director Fanger explains by phone from Beijing. With that in mind, the duo starting traveling to China and looking at distressed debt transactions.

Since launching the firm in 2004, Shoreline has completed three non-performing loan transactions and is on course to complete additional deals this years—as well as a its first distressed real estate deal.

According to Ernst & Young, China has more than $133 billion in outstanding NPL portfolios. Sensing this opportunity, Zhang and Fanger eventually teamed up with Minneapolis-based opportunistic firm Cargill Value Investors—now known as CarValue Investors—and closed their first deal in 2005, a Shenzhen-based NPL portfolio with a legal value of $222 million. It was followed in 2006 by a $223-million transaction in Changsha and a deal in Hunan with a value of $246 million.

As the firm has closed these deals, it has opened new offices to service the portfolios—it now has offices in Changsha and Shenzhen, in addition to its Guangzhou headquarters. The firm has a staff of 25 and has added a third partner: Linyu Yang, a real estate professional. Shoreline is looking to add more staff, as well.

There are plenty of other challenges to investing in the distressed debt sector of an emerging market like China.

Fanger points out that the information given by the seller and borrower is not always completely accurate. Assets may have unforeseen problems. Sometimes sellers have an unrealistic idea of what their assets are worth—fifty cents on the dollar, rather than pennies.    

“It’s very difficult to get a feel from an Excel spreadsheet what the value [of an asset] is,” he says. “The transparency is an issue, but it also provides opportunities. We have found ways to find information and do the due diligence to price the assets reasonably.”

“We avoid portfolios with hidden problems and invest in the portfolios with hidden value,” he adds.  
 
Looking to the future, Shoreline hopes to launch a discretionary fund for LPs wanting to tap the distressed debt and retail markets in China. Fanger was unable to discuss specifics, but said the plan was to begin raising money in 2007 and felt the fund would raise at least $50 million.

“We see no reason to not have a discretionary fund for these kinds of investments,” Fanger says.