Ex-Goldman Manager Raises Fund for China Property Debt

(Bloomberg) -- A former Goldman Sachs Group Inc. special situations group head has raised an initial $245 million for a new fund that will invest in loans and bonds of China's beleaguered property industry.

Jason Brown's Hong Kong-based Arkkan Capital has completed a first close for the Arkkan China Real Estate Fund and plans to raise more money in the first half of next year, it said in an emailed statement dated Wednesday. It will target stressed and distressed assets.

Arkkan is joining firms including T. Rowe Price Group Inc., Allianz Global Investors and Goldman Sachs Asset Management in tapping opportunities in the heavily sold-off Chinese real estate industry. 

A profitable trade for global credit investors for nearly a decade, the highly leveraged sector has fallen out of favor amid government efforts to reduce financial excesses. An index packed with junk-rated dollar bonds of Chinese developers has slumped 25% from a May high.

“The dislocation in China real estate high-yield credit has created a compelling investment opportunity that we expect to play out over the next two to three years,” Brown said in the statement. “Current pricing implies historically high default rates and suggests a systemic crisis which policy makers are unlikely to permit given the economic significance of the real estate sector.”

Brown cited previous precedents when market dislocations in emerging-market credit created profitable buying opportunities for asset managers with long-term capital and restructuring expertise. He argued Chinese real estate credit could generate similarly high returns for Arkkan.

Read more on Brown's Arkkan

Brown once led Goldman Sachs's Global Special Situations Group that invested in the debt and equity of troubled companies and made loans to high-risk borrowers using the bank's own capital. He set up Hong Kong-based Arkkan in 2013 to invest in high-yield performing assets, distressed and stressed bonds and loans in the primary and secondary markets. 

Chinese regulators' concern about slowing growth has fueled speculation that Beijing will scale back on its tightening measures in the property industry. Officials have already been easing up in areas such as home mortgages, local government land auctions, and domestic interbank bond issuance.  

“The squeeze on real estate funding is the deliberate result of a central policy decision that we expect to adjust should there be any systemic risk implications,” Brown said. “In that regard, the market has already started to observe signs of policy loosening in parts of China.”

T. Rowe Price has been buying Chinese developer bonds since the start of September, focusing on investment-grade and BB rated bonds, as well as companies with cash and resources to navigate the period of stress. Goldman Sachs Asset Management has been adding a “modest amount of risk” through high-yield bonds of real estate firms.

©2021 Bloomberg L.P.