While the blossoming Chinese economy has drawn a throng of investors looking to capitalize on its growth, the opportunity for distressed plays in China has been largely overshadowed. Colony Capital, though, has not looked past the potential. The firm, along with Chinese conglomerate Shanghai Industrial Investment Corp. held an initial closing on the team’s first China-dedicated distressed fund, The Yangtze Special Situations Fund, corralling approximately $100 million in the close.
The fund, which is targeting a total of $500 million, has received commitments from the International Finance Corp., the Asian Development Bank and other financial institutions.
“China represents a duality right now,” Colony Principal Jonathan Grunzweig said. “It’s one of the fastest growing economies in the world, but it’s also the second largest distressed market right now, behind Japan. There’s a lot of investment capital going into China, but our niche is going to be in the distressed space… It’s never been a question about whether we planned to get into China, but rather when we would get in and with whom.”
For Colony, its entrance into China should not present a complete culture shock. Colony has maintained an office in the country for two years now, and has been developing contacts throughout its stay. Also, the firm has made a point to align itself with incumbent players that have a strong reputation in the region. “This is one of the best positioned local companies,” Grunzweig said of Shanghai Industrial. “It has Western standards of integrity and is a respected institution here, with strong ties to the public and the government.”
Also, while Colony is new to China, the firm has been very active in Asia during the past decade. With offices in throughout Asia and Seoul, Colony has made more than $600 million worth of investments in the region since 1998.
Even as Colony has built its name on real estate investing, this fund is expected to focus more on acquiring control positions of depressed corporate entities through recapitalizations. However, Grunzweig did say that there would be some wiggle room for Colony to invest in direct real-estate investments and non-performing loans. The fund will primarily target deals in the People’s Republic of China, but will also seek out transactions in Hong Kong and Macau.
The Great Hindrance?
While China’s economic growth has been dramatic, some worry that it has all happened too fast and could lead to a bubble. In the first quarter, China registered a 9.7% jump in GDP, bolstered by a flow of fixed investment spending and bank lending. To curb the growth, the Chinese government has already begun moving to tighten its monetary policy.
Parallel to the country’s growth, the M&A activity has been surging in China as well. According to M&A Asia, the aggregate value of deals in China in the first quarter grew by 55% over last year, reaching $8.7 billion. PricewaterhouseCoopers’ Jim Woods, a partner in the firm’s Transaction Services group, said in a statement, “In addition to corporate deals [in the Pacific rim], we are also seeing increased interest from private equity funds, particularly in Mainland China, Japan and Australia.”
However, despite the increasing activity, Colony feels its corporate ties and focus on distressed situations will help the firm outmaneuver competition and avoid bubble-inflated investments. Grunzweig said, “We’re focusing on corporate recapitalizations because we believe the expertise and advantages provided by our local partners will really help us. Plus, we’ll have the advantage of being an early mover in the distressed space.”
While some sellers could be remiss to sell to an outside investor, Colony will not be looking at opportunities where its presence is not wanted. “The restructurings we’re talking about investing in will be decidedly consensual. Our focus on corporate recaps will be to help solve problems for the operators. We’re not necessarily trying to take title away from anyone,” Grunzweig said.
Grunzweig could not give a time frame for when he expects to hold a final close on the fund. Upon the completion of the fund raising, the vehicle will have a maturation period of seven years, and it will allow for co-investments.