The Last Word

Adamas Asset Management, a specialist in short-medium term mezzanine investments in China, has just held a first close on its sophomore fund as it targets $200m. Partner Conor MacNamara talks to Private Debt Investor about raising capital for Asian debt investments.

Q Congratulations on the first close. What changes have you made to this fund’s strategy compared to Fund I?

This Greater China Credit Fund, or Adamas Asset Management Fund II, is broadly similar to our APCF Fund I. Fund I had a mandate to do deploy about 45 percent of its capital in term loans, 45 percent in late-state IPO funding, and 10 percent in strategic equity, including PIPE transactions. Strictly speaking, whilst Fund I is predominantly credit, there’s a component of strategic equity which Fund II will not have. We sat down and discussed whether we wanted to be a pure credit player – we decided we did indeed want to be 100 percent credit-focused, so that influenced the Fund II strategy.

Q So what’s different about Fund II?

About 60 percent of the capital will be deployed via term loans and bridge financing, with 1-2 year terms and a 20-25 percent coupon. Up to 40 percent will be structured financing with a yield component, and will make use of put options, warrants and equity kickers to achieve a 30-35 percent IRR return.  However, if deal flows on pure credit deals were strong, we would have lesser allocation to the structured play. Though the structured plays do offer greater upside, typically through an event via IPO.

One aspect of Fund I is that we never went into deals for more than two years. But we missed a few deals we liked as a result of that limitation. Now with Fund II we have the flexibility to go out to three years if we want to.

Q What sort of returns have you targeted?

Fund I has delivered a gross IRR of 26 to 27 percent, and a cash-on-cash multiple of about 1.7x. For some types of investor, it’s important to be able to get past the 2x multiple however, because of how they’d characterise our fund, so we’re now aiming for between 2x and 2.5x for the new fund, which we think is very achievable. Annual cash distributions for Fund I have stood at 8 percent, and with Fund II we’ll look to hit 8-10 percent.

Q What types of investor are demonstrating demand for this    type of fund?

We’ve had strong interest from investors in the US and Middle East, particularly from the Kingdom of Saudi Arabia and Kuwait. We’ve always made a point of offering our LPs co-investment opportunities, and if they commit to the fund, then we offer them the chance to co-invest up to the same amount with zero fees on that co-investment.

Q How’s your pipeline of deals looking?

We’ve just made our first investment with this fund, a $10.4 million investment via a high yield bond to a Hong Kong Stock Exchange-listed company. We are taking HK legal risks (English law). The bond will be used to finance the acquisition of an iron ore concentrate trading company in the Philippines. It’s a two year deal, with the option of a one year extension, paying a 20 percent coupon and with a strong security package (LTV of 20 percent) Current pipeline is close to $150mil. 

Q And are you optimistic about reaching your fundraising target?

We hope to hold a second close sometime around the end of the year. We have a $200 million target, and a $275 million hard cap. We’ve had good support from some of our Fund I investors so far and were delighted to have new investors such as San Antonio Police & Fire Pension Fund commit to Fund II.  We look forward to building out the LP base further.  

Conor MacNamara is a partner and Head of Business Development at Adamas Asset Management.