Warburg Pincus launches distressed asset venture in China

Warburg Pincus is launching an asset management company in China to target distressed opportunities across the country’s heavily indebted real estate sector.

The US private equity firm said on Monday it was investing $600m in a partnership with Wensheng, a Chinese asset manager, and intended to build up as much as $5bn of assets under management in the next half decade.

It is the latest example of big US banks and investors forging deeper ties across China’s financial industry, despite the charged geopolitical backdrop between the two countries. 

It also comes as Beijing has begun to squeeze the country’s vast property sector, imposing leverage constraints on its biggest developers and limits on mortgage lending by banks.

“In light of the ongoing financial reform in China and the continued regulatory development, the real estate special situations sector is entering an accelerated growth trajectory,” said Qiqi Zhang, managing director of Warburg Pincus.

China’s distressed debt sector has been under the spotlight in international markets this year after Huarong, the state-backed distressed debt manager that has $22bn of dollar-denominated debt, failed to release its annual report in March. 

The delay raised questions over its Rmb1.7tn ($260bn) balance sheet after the January execution of its former chair for financial crimes, and triggered wild swings in its bonds after trading in its shares was halted.

Warburg Pincus was an investor in Huarong ahead of its 2015 initial public offering in Hong Kong, and still has an 8 per cent stake. Across Asia, it has invested $6bn in real estate since 2005.

China’s rapid economic recovery has raised concerns over prices in its property sector. The government’s so-called “three red lines” policy, which was initially signalled last summer, forces developers to comply with balance sheet metrics designed to control their borrowing. 

Evergrande, the country’s most-indebted developer, has seen its share price fall 33 per cent so far this year and embarked on a series of asset sales. In March, it said it had reduced its total interest-bearing debt by almost a quarter to $103bn.

Other US private equity firms are also active in China’s real estate sector. In June, Blackstone announced it had struck a $3bn deal for Soho China, an office developer. Earlier this year, it purchased an urban logistics park in South China for $1.1bn. 

Other recent US joint ventures include a Goldman Sachs partnership with ICBC, the state-owned bank, which was unveiled in May.