Why Private Credit Is Leaving China and Looking Elsewhere

Meet the alternative path for capital.

Why Private Credit Is Leaving China and Looking ElsewhereIf you’ve ever been to China and wondered how on earth they build so much so fast, you can thank private credit. Often referred to as “shadow banking” in China, private credit is a major driver of growth around the globe, particularly in emerging markets. In China, where banks have archaic restrictions in terms of how and to whom they can lend, private credit has flourished throughout China’s “economic miracle” of rapid industrialization and development. That being said, things have drastically changed in China over the past few years, and thus private credit is looking elsewhere. How Private Credit Works in ChinaPrivate credit has been very prevalent in China, particularly after its admission into the WTO in the early 2000s, which put its development track on steroids. The huge injection of stimulus in 2008 that the Chinese government enacted on the back of the 2008 financial crisis led to an explosion in the industry. ©Manchester SchoolShadow Banking 101Shadow banking is financial institutions that lend outside the traditional banking system, in other words, “private credit”. However, the shadow banking system in China often comes with “loan shark” interest rates for borrowers and sometimes loan shark enforcement if the principal is not paid back. The most common types of private credit facilities in China have taken 2 forms:

• Chinese Trust Companies

• P2P Lending

  Chinese trust companies and P2P lending work in a similar fashion. Investors invest in fixed-income structured products and the capital is then allocated as private credit to private individuals or businesses, usually SMEs. An investor might receive an 8% annual return, and the trust company or P2P firm takes all the further upside. Remember these are all UNREGULATED, meaning they are susceptible to fraud, negligence, and arbitrary rulings by the CCP.What’s Happening Now in China?The Chinese economy is suffering some serious headwinds as well as complex structural problems that can be summed up in 3 ways.

• An oversupplied and moribund property market that will take years to correct.

• Local government debt is out of control.

• Consumer confidence is at rock bottom, causing deflationary pressure.

 The local government debt and property market are tied together, as one of the reasons the property market skyrocketed over the past 2 decades, is the windfall it created for local governments via land sales. The decline of the property market has been a major revenue killer for local governments, and thus the debt load is becoming unmanageable.Problems in Chinese Private CreditOver the past few years, there have been quite a few bankruptcies in China, including the recent filing of Evergrande. Private credit has also taken a massive hit; below are a couple of examples. Zhongzhi Enterprise Group – China’s largest trust group and very popular with HWNI in China. Zhongzhi Group is/was the largest trust provider in China and filed for bankruptcy in January 2024. Ezubao – P2P lending platform that declared bankruptcy in 2018 with over a $7.3 billion loss. Private Credit Investors are Flocking to North AmericaWe all know that China’s stock market has taken a massive hit in 2024, with trillions of dollars of capital exiting the market. The Nikkei has been at a 34-year high due to the exodus of capital from China which needs to go somewhere else in Asia to satisfy portfolios. Private credit has seen a massive exodus as well, with the news late last year dropping that Carlyle Group is winding down their China credit team due to the current state of the market and a failed JV opportunity. This money needs to go somewhere, and once again the United States offers immense growth potential as well as protection under the rule of law, something that isn’t necessarily offered in China.We don’t always just look at data, we go by our own first-hand experiences. There has been a ton of interest in repatriating capital that was allocated to the private credit industry in China, back to the US, as well as Asian-based investors with no US experience looking elsewhere. Here is why the US private credit industry is booming, and Chinese capital is making its way stateside: Increased Demand for Alternative Financing: Small and medium-sized enterprises (SMEs) are increasingly turning to private credit for financing. Higher Interest Rates Impacting Traditional Bank Lending: Due to the interest rate environment, the cost of capital has become higher for banks, resulting in more difficult lending requirements. Many of these borrowers are turning to private credit. Market Size and Growth: The private credit market has grown from $875 billion in 2020 to $1.7 trillion in 2023 and $200 billion in new capital was raised industry-wide in 2023 (Preqin). Regulatory Environment: The private credit regulatory environment in the US has promoted huge growth in the sector and is governed by the rule of law, unlike some emerging markets.

Investment Details

The Fund invests in a diversified portfolio of senior secured loans, among other private credit opportunities.   Senior secured loans have historically provided a natural and effective hedge against inflation and rising interest rates

AdCap Private Credit consistently delivers IRR between 25% to 28% per year

- $50,000 Minimum Investment 

- 8% Preferred Return

- Single Tier Split of 80% (LP) / 20% (GP)

- IRR 25-28%

- Monthly distributions at 14-16%

- This is a 506(c) offering available to accredited investors only

We are here to listen!

Dane Adelman[email protected]216.403.6244Eric Wolf[email protected]516.761.5477

If You Would Like to Invest Please check out our current offerings by clicking below.  If you'd like to discuss this investment offering further or any others before moving forward, please schedule some time with me or Eric through the emails above or simply replying to this email indicating your interest.Referrals WelcomeDid you know that you can refer anyone in your direct network to AdCap GP if you are excited about the value you are receiving from us. Your referral automatically satisfies the preexisting relationship requirement from the SEC for our investment opportunities.  Feel free to forward this email to your friends and family.