Hong Kong-based Adamas Asset Management and China’s Ping An Trust have unveiled details of an SME-financing fund they have soft-launched, citing strong demand for capital from smaller mainland corporates. 

It is a few months behind the original schedule and comes amid rising concerns about default risk among Chinese corporates. The joint venture, Adamas Ping An Co-Management, had reportedly previously planned to close it in the second quarter of this year, but is now looking to close in the coming 12 months.

The fund aims to raise $500 million offshore from institutional clients to finance Chinese private small and medium-sized enterprises (SMEs). Its focus is on healthcare, consumption and ‘new economy’ sectors such as IT and technology supported by the Chinese government in its 13th five-year plan.

The fund will have a two-year investment period and a one-year divestment period. It aims to finance five to 10 deals with a collateralised loan size of $50 million to $100 million and is targeting an annual return of 15-18% per loan deal.

Adamas will source deals from Ping An Trust’s network of borrowers. It has already has funded around 60 mainland SMEs in the past six years via its offshore private equity funds.

Default risk is one of the key risks the fund faces, said Barry Lau, chief investment officer of private credit at Adamas. Hence his team will get involved in the financial management of the companies the fund is financing, such as through “quality assessment”. By this he means assessing the outlook for the business or expansion for which a loan is being sought and therefore the likelihood of loan repayment.

Credit risk concerns are rising in China, following the default by several companies on both onshore and offshore bonds. Hong Kong-listed Shanshui Cement defaulted on a dollar bond this month, and Kaisa Property did the same in January. Meanwhile, mainland firms Cloud Live and Baoding Tianwei Baobian Electric defaulted on onshore RMB bonds this year.

As of end-July 2015 the trailing 12-month high-yield default rate for Chinese non-financial corporates stood at 6.7%, up from 5.1% at year-end 2014, according to rating agency Moody's. By contrast, the high-yield default rate for Asian non-financial corporates has fallen to 3.9% from 3.6% over the same period. 

Private debt financing, a common activity of mainland trust companies, is categorised as part of China’s ‘shadow banking’ landscape. Despite the concerns that such lending could pose a threat China’s economic stability, mainland economists say it provides much-needed capital to SMEs and thereby boosts growth in the private sector.

Only 5% of the 50 million mainland SMEs can obtain traditional bank loans, which tend to be taken out by state-owned enterprises and listed companies. 

Adamas had $650 million in AUM as of end-2014, with most of its assets gathered from family offices and institutions. Ping An Trust had Rmb400 billion ($63 billion) in AUM as of the end of 2014, and most of its clients are wealthy onshore investors.