PAG Wins More Than $800 Million Commitments for Second Loan Fund

Jun 22, 2014 11:22 pm ET

June 23 (Bloomberg) -- PAG, a Hong Kong-based manager with more than $10 billion of assets, has received more investor commitments than it had targeted for a second fund that will provide new loans to Asian companies.

PAG plans to cap the Asia Loan Fund II at $900 million, said Chris Gradel, chief investment officer of the absolute return business at the company that also runs private equity and real-estate funds. About 85 percent of the more than $800 million in capital committed came from investors in its first Asia loan fund, he added.

PAG is tapping international institutions’ search for yield in a low-interest rate environment to meet demand by borrowers. Global banks have retreated from the Asian credit market after being pressed by regulators to shrink balance sheets and boost capital while real estate developers in China face financing needs as the government tries to curb property overheating and growth of lending.

“We still think it’s an attractive opportunity to be a non-bank lender filling in the gaps in the market,” Gradel said in an interview in Hong Kong on June 20. “The restrictions on traditional lenders are going to be around for some time. In China, the government’s aim is to try to reduce debt in the system.”

PAG started the $700 million Asia loan fund I in February 2013. It has generated an internal rate of return of just below 20 percent, Gradel said. All the 17 loans in the fund are performing, he added.

‘Attractive Market’

The Asia Loan Fund I is about 95 percent invested, Gradel said. Both funds have a five-year life with a target return in the high teens and extends 18 months to three-year loans.

About two-thirds of the loans in the existing fund have been extended to borrowers in China, mostly property developers using completed or almost completed prime real estate in first- or second-tier cities as collateral, Gradel said.

China was an “attractive market” for the fund between 2011 and the beginning of 2013, Gradel said. Lending rates are rising again as the government moves to curb wealth-management products that drove non-bank lending and overall credit expansion for much of last year.

China has been cracking down on shadow banking, including trusts and wealth management products issued by banks. A Barclays Plc report estimated a 38.8 trillion yuan ($6.2 trillion) shadow-banking industry at the end of last year.

Rising Repayments

Chinese property trusts will face a record 203.5 billion yuan of repayments next year, according to Chinese research firm Use Trust, fueling speculation of developer collapses. The trusts channel money from wealthy individuals to smaller developers, which have trouble obtaining financing elsewhere.

The Chinese government in May ordered banks to curb interbank lending to help slow growth in shadow banking. In April, China Banking Regulatory Commission told the nation’s 68 trust companies to restrict their businesses and reduce net assets or have shareholders replenish capital when they suffer losses amid rising default risk in the $1.9 trillion industry for high-yield investments.

PAG makes loans to developers that need capital to complete projects, refinance other debt or buy new land, Gradel said. It can get 16 percent to 19 percent rates lending to high-quality Chinese property developers these days, he added.

The $1 billion Pacific Alliance Asia Special Situations Fund LP, started in 2011, is also coming to the end of its three-year investment period, Gradel said. PAG plans to start discussions with investors in the third quarter about raising a second special situations fund, which invests in existing and mostly distressed loans, he said.

The first special situations fund has generated a return in the “high 20s,” and has invested about 1.5 times of the $1 billion raised by reinvesting the capital, Gradel said.

The fund has bought debt portfolios from European banks, which are selling “non-core assets” in Australia, New Zealand, Japan, Korea and Southeast Asia, he said. In June, it acquired 700 million euros ($952 million) of Japanese commercial real- estate loans from Commerzbank AG, according to a statement from the German bank.