CDB $10BN FUND TO TARGET ASIAN SMEs / THE FINANCIAL TIIMES ( HIGHLY RECOMMENDED READING )

July 4, 2011 7:42 pm

CDB $10bn fund to target Asian SMEs

By Henny Sender in Hong Kong

China Development Bank, one of the country’s largest state-owned banks, is emerging as an increasingly active overseas investor, using its $10bn CDB capital fund to take stakes in private equity and hedge funds.


In its latest move, the CDB fund is seeking to develop its expertise in and understanding of intellectual property associated with lending to small and medium-sized companies, a market Chinese banks have never felt comfortable with due to the risk of default.


According to people close to the situation, CDB, through its fund, is set to become a cornerstone investor in MP Pacific Harbor Capital, an Asian credit fund that lends to SMEs across Asia in which New York hedge fund MatlinPatterson has joined local lender Pacific Harbor.


Matlin Patterson, which was originally part of Credit Suisse’s global distressed team, has almost $10bn under management, while Pacific Harbor is led by Warren Allderige, a veteran of decades of lending in Hong Kong, including at both the ill-fated Lehman Brothers and Peregrine.


The MP Pacific Harbor Capital deal – which comes weeks after CDB agreed to join a group of sovereign wealth funds taking a small stake in buy-out firm TPG – will give the capital fund an economic stake in the management company and the right to co-invest in any deals to which the fund commits.


In addition, CDB’s fund will be able to transfer technology and send trainees to Matlin­Patterson’s head office in New York, both useful to the bank as it develops its SME lending in China.


Chinese banks have historically preferred to lend to state-owned groups, judging that they pose negligible credit risk. As a result, many SMEs, which struggle to get bank credit at the best of times, have had to slow ­production and warn of bankruptcy.

In an effort to tighten credit, China has over the past nine months raised interest rates four times and banks’ required reserves nine times, heaping even more pressure on the country’s SMEs, which employ the bulk of China’s workers.


Banks have been criticised for their indifference to such groups, with Wang Qishan, vice-premier, on Monday urging them to lend more to the beleaguered sector.


CDB – which is not publicly listed, unlike many of its peers such as China Construction Bank – lends in accordance with Beijing’s national policy. It has been among the most active of the Chinese banks in figuring out how to channel credit efficiently to such midsize companies, which often lack a credit rating and are too small to access the capital markets by themselves.


The development of the market has been slowed by legal concerns about the extent to which creditors can actually seize assets in the event of non-payment.

The plan is to take the fund public on the Singapore Stock Exchange within 24 months, catering to the demand of investors for yield in a low interest world and giving the fund the nirvana of permanent capital.
.

Copyright The Financial Times Limited 2011