Exclusive: Ping An and Adamas in $500m fund talks

Ping An Insurance (Group), one of the largest financial institutions in China, and lender Adamas Asset Management are marketing a debt vehicle with an initial target of $500m.

Chinese insurer Ping An Insurance (Group) (Ping An) has entered a memorandum of understanding with private lender Adamas Asset Management to co-manage a $500 million debt fund, sources close to the situation said.

Both firms are speaking with several major institutional investors, some from the Middle East, to co-invest along with Ping An. The target size is $500 million but it could be more as there is no hard-cap on the fund, a source said. The agreement is subject to final documentation but there is strong market interest, he added. The plan is to draw down capital by the end of the second quarter of 2015. At present there is a pipeline of 22 deals.

The initiative is the first for Ping An in terms of raising US dollars, PDI understands. Until recently, the institution had concentrated mainly on the China onshore funding market, a second source said. However, Ping An has invested in fund of funds and in different US dollar private equity funds as a limited partner.

Ping An is expected to allocate $250 million in capital through its Chinese clients which have offshore funds and Adamas will use its network to raise funds internationally, PDI understands.

The fund will extend structured collateralised loans to small to medium-sized private enterprises in sectors such as project financing, healthcare, energy and real estate. The typical tenor of a loan will last 12 to 36 months and generate gross internal rates of return of 15 to 18 percent over the life of the fund, which will have a two-year investment period and 1 + 1 year divestment period, with no leverage used to enhance performance, according to documents seen by PDI. Typical loan size will range from $30 million to $150 million resulting in an initial target of 8 to 15 deals being closed.

The proposed fund structure would be split between senior and subordinated limited partners. Management fees of 2 percent on commitment during the investment period and on invested capital thereafter have been proposed. Once both senior LPs and subordinated LPs receive distributions of 6 percent per annum, the GP will receive 20 percent of the 6 percent preferred return. A performance fee of the remaining return after deducting all the other fund fees, expenses, distribution to LPs and catch-up to GP, will be split 80 / 20 between subordinated LP and GP. The investment team will be overseen by four investment professionals – two from Ping An and two from Adamas.

Deal flow for the vehicle is plentiful, the second source said. A sizeable majority of SMEs in China have a difficult time accessing traditional bank financing, as a result of market bias with state-owned banks lending to state-owned enterprises, and the high risk associated with lending to private SMEs and growth enterprises.

The Ping An / Adamas fund will grant Adamas access to greater deal flow, given the extensive nature of Ping An’s network in China, PDI understands. It will also give Adamas greater access to capital, as the size of its previous funds has limited the scale of commitments it could attract. The lender, with offices in Hong Kong and Shanghai, has been making bridge loans to Chinese businesses for several years and expects to hold a final close on its second debt fund, the Greater China Credit Fund, by May 2015 on $280 million, as PDI previously reported. It amassed commitments from investors in Europe, the US, Asia and the Middle East, primarily pension funds, private banks and family offices. Last year, it made 15.6 percent cash distribution to its investors extending loans backed by real estate with average loan-to-values typically ranging between 30 to 40 percent.

Ping An and Adamas Asset Management declined to comment.

Ping An had consolidated total assets of about RMB 3.8 trillion as at 30 June 2014. Adamas Asset Management will have $900 million of assets under management upon final closing of its second debt fund.