Today’s guest is Ben Fanger. Ben is the Founding Partner of ShoreVest Partners and is one of the pioneering investors in China’s non-performing loan market. Ben has managed over $1.6 billion of investing into Chinese NPLs over 3 fund cycles.
In this episode Ben shares his views on the transparency in the Chinese business environment, geopolitical risk between the US and China, his view on the risk/return tradeoff for credit opportunities for the US vs China as well as Competition in the Distressed Debt market in China.
Today’s guest is Ben Fanger. Ben is the Founding Partner of ShoreVest Partners and is one of the pioneering investors in China’s non-performing loan market. Ben has managed over $1.6 billion of investing into Chinese NPLs over 3 fund cycles.
In this episode Ben shares his views on the transparency in the Chinese business environment, geopolitical risk between the US and China, his view on the risk/return tradeoff for credit opportunities for the US vs China as well as Competition in the Distressed Debt market in China.
Today, we are really excited to welcome our guest Ben Fanger. He is the managing partner and founder of Shorevest partners and is one of the pioneering investors and China's credit markets. He has over a decade of Chinese credit experience and has been involved in all aspects relating to acquiring and disposing countless distressed assets in China. Ben has worked directly with Chinese distressed asset sellers, borrowers judges and government officials related to the investments and has managed approximately 2 billion in Chinese distressed debt and special situations investments. Ben has been fluent in spoken and written Chinese for over 20 years. He also holds a JD and an MBA from the University of Chicago and is a licensed attorney in the state of California. Welcome, Ben. Welcome. Thank you. Very happy to be here. Yeah. Great to have you here, Ben. Yeah. So let's get started.
Our first question is, so you were born in the States, you went to school there, but now you also speak fluently Chinese and you split your time between the US and China? What has sparked your initial interest into China?
Oh, well, it's, for some reason, in the late mid to late 90s. When I was in college, it's you know, seemed like an interesting place. I actually studied German in high school, but and there's, you know, family heritage reasons to learn German instead. But Chinese seemed more alien. So I ended up living in Taiwan for a few years during my college years, where they generally speak Mandarin. And I majored in Chinese and philosophy, studied some ancient Chinese philosophy and so forth. And then, you know, so at the time, it was just serendipity. But ultimately, later, it became a fundamental part of my career.
Understood. Okay, well, not all of our audience, private credit specialists been, could you please share with us briefly the types of strategies and really simple terms you work with?
Yeah, so I think private credit, obviously, it's an area that LPs around the world have been increasingly interested in the last five or 10 years. And so if we think about what the private credit is, and then what aspects of that we do in China, I can just kind of try to summarize it this way. So private credit is essentially providing loans or other kinds of credit instruments to companies outside of the traditional commercial banking system, that could be a direct loan to a company, you know, in the US, it might be unsecured loan to a company, because the, the investor believes that the company will be able to pay them back, right. So in China, though, what we do is almost always asset backed, so it's first lien and on real estate. And so among the kinds of private credit you can do, there's safer or riskier, and the safer always ends up leaning in the direction of first lien, backed by buildings, rather than completely unsecured. So like credit card debt, for instance, is obviously unsecured. And so it's quite risky. In between those two, there will be the kinds of private credit that a manager might call secured, but I wouldn't consider it secured. So that would be like quote, unquote, backed by the, the accounts receivables of the company, or even a pledge of equity. So the stock and the company is pledged as collateral. All of those kinds of things are not hard assets.
And so that's not really what we do in China. So what we do in China is asset backed, usually first lien on buildings. And so ultimately, at the end of the day, there's always some immovable asset that isn't there to make sure we get paid back. And the ways that we access that kind of asset backed credit, there's really two ways one is performing and one's non performing companies. So the performing lending that we do is where a company in China can't get a bank loan, or maybe they're just, they're doing something that requires a little bit. An investor or lender that's a little bit more nimble than a traditional commercial bank. And so they'll come to us and ask for a bridge loan 18-24 months, they have some asset that can be used as collateral the company is performing, it's just that they need an alternative to traditional lending options. That's the first kind of way that we would access this product.
The second is non performing loans, which the commercial banks in China are surprising lead to some, these are the largest banks in the world. So these are massive banks. They have, obviously, as any bank, some of the loans that they've made, the companies can't pay them back on time. When that happens, because of banking regulations in China, the banks are forced to write those loans down and then sell them into the market. Because if they hold them, they are essentially punished by the regulatory framework in terms of the capital adequacy that they need to hold against those loans. And so they will sell the loans and we buy them at pennies on the dollar, sometimes more than pennies on the dollar. So usually kind of on average, around 20 cents on the dollar. So if the company owes Bank of China, for instance, 100 million RMB, we might buy the loan for 20 million RMB. And that's also asset backed. So we're also focusing on first lien loans, where the underlying collateral is good, regardless of the status of the company.
Alright, and, yeah, Ben, you already touched upon kind of the risk factor of the asset backed investments in China, in general, you could have chosen like any place in the world to operate in, but what for you makes China such an interesting place to work in?
I mean, there are many things that just seeing the conversations with taxi drivers, the you know, the fact that there are, you know, there are probably millions of dishes in checklist because there are lots of things that make it interesting, but but more directly to your point, you know, what makes it interesting for a private credit investor, an opportunistic, asset backed credit fund, there's several points I'd make.
So number one, the size and scale of the market. So China, as I mentioned, has the largest banks in the world. It also has the largest NPL market in the world. So you know, if we're buying non performing loans, the market in China is larger by our calculations anyway than all of Europe combined. It's certainly larger than the United States, and mainly because of the stimulus that's occurred in the last year. So there's no real NPLs to speak of in the United States, there probably would be if the government didn't implement, you know, trillions and trillions of dollars of stimulus. But the fact is that it's the largest distressed debt market in the world.
Then on the special situations and direct lending side, the banks are the largest banks in the world, but they have not provided a nimble enough amount of lending to serve the purposes of companies in all cases. And so, because of that, after around 2013 or 14, the shadow banking system emerged in China as the alternative to commercial banks. But China has largely scaled that back. So the government has recognized the risks both both social unrest risks are the risks created by the shadow banking system, primarily because it's backed by retail investors, they've really scaled that back. And therefore there's a vacuum of capital in the private credit space in China. So I would say that what makes it interesting to us is that it is just number one is it's just a massive market. And there are plenty of things to do both on the performing and the non performing sides of private credit in China.
The second point I would make is that even prior to starting this platform, I grew up in Silicon Valley, I have started a couple other companies that I sold the public company, so I have an entrepreneurial background. And I've recognized that when you're starting something new or entering a new venture, or investment space, really, you don't just need a large market. I mean, obviously, if I tried to compete with Amazon right now, I would not be very successful about that. With that you don't just need a large market, you also need some competitive advantages that are very hard for competitors to replicate. And China presents an opportunity where for us there's a huge moat around what we do. So it is very difficult for other competitors to replicate what we do it takes a long time to get experience. For instance, you know, enforcing loans in China, to be able to enforce a loan and a Chinese court there are not very many managers in the world that have that experience, then you also have sourcing in China, I mean, I've been running around China sourcing deals in the credit space for now 16 years. And it's just going to be very difficult for a new entrant to replicate the kinds of relationships that we have to be able to source both both the non-performing loans and also the direct lending opportunity. So the two points I would make that make it interesting is number one, is a massive market. And number two, there are very significant barriers to entry.
Absolutely, and, and maybe drawing on on your last point being with the significant barriers to entry, you know, obviously, that you said the size and scale of the Chinese market only continues to grow. So have you seen a lot more newcomers come into the market? And is it purely just the relationships that you've built in the last 16 years that have that have helped you outperform them? or What can you say to the how the competitive landscape has changed and how you expect it to change going forward?
Yeah, well, so any large market even if it does have significant barriers to entry, sooner or later entrants come so that that is inevitable? Over the last decade and a half? We've seen many attempts to come into the space by the kind of well known investment banks and also credit managers. And I have not seen any situation where they've been phenomenally successful at that. And I think the primary reasons are, number one, usually, so like a global credit manager, for instance, that's based in Los Angeles, or New York or Boston, these managers will first attempt, actually, first they knock on our door, they ask us if they can buy our firm. And when we say no, they hire some junior or mid level people in China. And often the people that they're hiring are maybe even born and raised in the United States, but ethnically Chinese, and so that's a person that's comfortable for the western investor, because they're, you know, it's a Chinese person whose native English language is English, but that person has never spent any time really doing business in China. And so what we've found so far anyway, and this really started in 2000, I first got into non performing loans in China, in 2002, and 2003, when I was still in graduate school, working on the legal side, for actually, Morgan Stanley was buying a portfolio of non-performing loans and in Beijing, and I was doing legal advisory work there. And that's what gave me the idea to start our platform a decade and a half ago. And since then, during the first cycle of NPL sell offs between 2004 and 2008, we saw a lot of foreign investors come and buy a couple deals and try to participate in because they were not run by people who really understand China, or who spend really any time in China. So like the investment committees of these firms would be sitting outside of China, in New York or somewhere else, and they would have junior level people running around China looking for deals. And there's just a huge disconnect there. Where, number one, even if they do find a good deal, how they explain that to the Investment Committee that's sitting in the West somewhere, and whether that investment committee really will have good judgment as to whether it makes sense to buy that deal, is a huge problem. The other problem is that a seller in China, so a commercial bank in China that needs to sell $50 million, say they really need to sell $50 million of non performing loans this quarter in order to make their quota. They're not going to go to a mid level person who's a scout running around China that doesn't have decision making capability.
So and also a CEO of a company, who I mean in the last six months we we did a couple bridge loans to both public companies and also pre IPO. So companies we're going to go public soon we did bridge financings to them. So these are well performing companies with lots of access to credit, but they needed something more nimble. So they came to us, the CEO of that company. So one of the deals we did earlier this year, I was sitting with the CEO in Guan Jo and his first question was similar to lots of questions we get from the sellers of NPLS and that is, he said shortest time which is Chinese for Who makes the decision, you or someone else, like, they need to be talking directly to the people on the Investment Committee, you know, we're able, we're always able to say our entire investment team is based in China, they can talk to any any one of us in their native language. So it's just from a sourcing perspective, and also decision making perspective, it's very hard for a US based firm, to just, you know, hire some junior level people and operating this fixed in fact, I've never seen it work.
But the foreign competition is only a tiny part of the overall picture, the local competition is the bigger piece of the puzzle. And on the NPL side, you know, most capital in China has been very focused on equity for the last couple decades. And so there's a lot of people who are experienced in venture and buyout and you know, public equity in China, but they're not very many, there are far fewer people who are experienced with something like opportunistic credit, like we do. So even within China. I mean, I am an American, I was born in America, but I'd never speak English on a day to day basis. It's, it's really an entirely local platform. And for when we're comparing what we do to other local competitors, they're just really aren't that many that have this this many years of experience?
Yeah. And I think that's really interesting. You know, from Shorevest, fast, and your firm, your whole investment team is in China, and you have very deep market knowledge there. So I think what is interesting to learn from you, you know, you have a lot of experience doing business with Chinese people, from your perspective, how transparent is this business environment, then both from kind of a cultural perspective, and also from a regulatory perspective?
Yeah, that's, that's a great question. Both the cultural and regulatory are important aspects of this. from a cultural perspective, I would say that Chinese business people are quite savvy, they're, I would say, in many ways, no different than us business people that won't disclose more information than they need to. However, 15-20 years ago, there was a lot of fraud in China, there was a lot of cooking the books when financials were given. And that was survival. Like, I think that China's history in the last 100 years has created an environment where there was historically a lot less trust. And so understandably, when there's a lack of trust, there's also a lack of transparency.
However, in recent years, and in the last decade, the Chinese business person has recognized that reputation matters a lot over the long term. And so it's worth being honest. And this is not every business person in China, obviously, you know, it's also not every business person in the United States, there are people who make the decision to commit fraud in every country in the world. But I will say that over the last decade and a half since I've been operating the country, the instances in which I see a company, just really intentionally committing egregious fraud is far less today than it was 15 years ago. And I think that's because the Chinese have recognized that, despite their difficult history in the last 100 years, it does make sense to trust people, it does make sense to be honest, for the sake of your long term reputation. So that's the cultural side of it.
From a regulatory side, the government has been very, very good at forcing honesty. And it is not successful enforcing honesty in every case, but it has been really effective at making huge improvements. And so for instance, with the banks, in 2015, I was sitting with the top regulator of all of the banks in China, in Beijing having lunch. And we were talking about the fact that they had trillions of dollars of NPLs. And I said, What are you going to do with these NPLs because the banks are going to try to hide them. And he said, we're going to go in and investigate the banks, and make sure that they are accurately recognizing and disclosing the non performing loans that they have, so that they can be cleaned up. So the government recognizes that if it doesn't have a clear picture of what a particular bank looks like, or what its balance sheets, risks are, or a company that you know, is public. If the public investors don't have a clear picture of the facts, then then that creates very significant systemic risks for the country. And so anytime China sees that there are social unrest risks or systemic risks to the financial sector, they're going to do everything they can to make sure that transparency you adhere to. So the government has made huge strides forward.
In that regard, I will say one final thing on this point. And that is that China's reputation as a business environment for being a place without transparency, I would say, in my view, and this is my personal opinion, in my view comes maybe 30% of that is because of actual intentional sort of fraud or lack of transparency in China, and 70% of that, or something like that comes from the foreigners, lack of understanding. So most of it comes from a lack of understanding on the part of the Western investor, they don't understand the documents they're seeing, they don't understand, you know why numbers are accounted for in a certain way. They don't understand the business culture in China. And therefore, they think someone's trying to screw that or try to trying to commit fraud. But the reality is, the fault is on the western investor, because they just don't understand what they're looking at. It looks Chinese to them, because it is Chinese. So I think China gets a bad rap in that regard, where, you know, a lot of the fault for this sort of lack of transparency, reputation should fall on the shoulders of the Western investors that have kind of parachuted into China have no idea what they're looking at, try to invest in something. And then they blame the Chinese when they lose money.
Yeah, that's a really interesting insight. And that way, you're really sharing your own experience from within. So I was also wondering if we could speak about, you know, you've you've spoken about the similarities between China and the US, but also wondering what you'd have to say about the kind of risk return trade off or create opportunities in China versus the US?
Yeah, first of all, let's just admit that no one in their right mind would say that least or would the conventional wisdom wouldn't tell us that Chinese private credit is safer than us private credit, except for me, I will tell you, Chinese private credit is safer than US private credit, if we take the markets as a whole, including all of the kinds of things that you can invest in. So why would I say that there's a really strong argument to make that Chinese private credit is safer than us private credit. The reason is, the product itself is different. So in China, when we're investing in private credit, it's almost always first lien backed by buildings, the loan to value that we lend is usually less than 50%. So 30 to 40%, loan to value. So if there's an office building in Nanjing that we're going to lend against, we're probably going to lend if it's worth 100 million RMB, we're going to lend maybe 40 million RMB. So that leaves 60 million RMB of room for that asset to fall in value, before we start to lose money. And so that's just a tremendous amount of product level safety, whereas in the US, private credit is generally unsecured. So we're talking about and not only is it unsecured. Now, in recent three or four years, you've heard all of this news and the LP kind of universe and in the publications that talk about covenant light transactions. So not only is it unsecured, but in the document, you don't even have covenants, which would cause the borrower to color within the lines, you know, they can move cash somewhere else, they can encumber their assets any way they want to, they can do a lot of things to make that unsecured position even more risky.
And then there are fun strategies in the US that call themselves secured debt, which, as I said at the beginning, is only secured by an accounts receivable. So it's not even an asset. It's an asset in the sense that there's a receivable but it's not a hard asset. It's also not cash in the bank. It's not in the bank yet. So that is in my mind is not secure. And so when we're looking at the fact that, in the US most private credit, the market is so competitive, that you have no leverage as an investor, because the company can just go to someone else. And when there's also a market where there's very little distressed debt because the government has flooded the market with cash. Then as a buyer of distressed you also have no leverage. And when you have no leverage in the negotiation, what that means is not only is your return profile less so you're maybe you can try to obtain a mid single digits return profile, but at Something that is, you know, maybe much less recognized is the fact that you're leveraged to create safety for yourself is also very minimal. And so you can't really demand covenants that protect you, you can't demand security for your loan. So that creates a very risky market. And in my view, in the last year, if the US government had not stimulated and created a lot of forbearance to the tune of trillions of dollars, now over $4 trillion, and we're getting we have, you know, more trillions to go, if the US had not done that, there would be a bloodbath, in private credit in the US. And yet, two years ago, in conversations I had with LPs, they were like, oh, we're gonna start with the safer market, which is the US, well in my mind, you know, unsecured credit in a space that's propped up by the US government, and super competitive to the point that you have no leverage to even have basic credit covenants, that is not a safe market to be investing in.
And so by contrast, in China, like I said, you know, we're generally lending at 30 to 40%, sometimes up to 50%, LTV on buildings, it's first lien, you know, these are enforceable credits. And this is, you know, kind of getting to the point of why would someone say, well, China is riskier, it's going to be because assuming, you know, the biggest risk in China is not knowing what you're doing. So if you parachute into China, if you're some us credit fund, and you parachute into China, and you try to do deals, like that's super risky, but it's only risky because of the lack of experience of the investor.
The other kind of risk is the legal and regulatory risk, which I would say it's not nearly as much of a risk as it was 15 years ago, when I was first in a court in China. You know, at that time, even the courts in China didn't really know how to handle credit. But now they're quite experienced. And we've seen the time it takes to force a loan go from, you know, four or five years is what it took 10 years ago to now 18 to 24 months. So that's that's gotten a lot better. And long story short, I would say that as long as you're investing through a group that knows what they're doing, and has a lot of experience, asset backed credit in China is safer than unsecured covenant, like credit in the United States.
Yeah, it's fascinating how these asset classes can differ so much, depending on the country, you already mentioned, the role of the US government, the courts in China. And I would like to zoom out a bit more, and ask you what your current view is on the geopolitical risk associated with China, and how you deal with that in your role as an investor?
Yeah, so first of all, I think, why is there this tension between the US and China is an important question to ask at the outset. And the reason that there is this sort of geopolitical tension between the US and China is exactly the reason that people should be allocating more capital to China. So and that is that the world is becoming increasingly bipolar, of course, Europe will never go away, you know, Latin America will never go away. All of these other regions in the world, and countries really are important as well. But as China becomes closer and closer to a size and scale of the United States, in that sense, it becomes kind of bipolar. And for that reason, unless you want to be only diversified to the extent that you're, you know, covering half of the world, which is what most investors are today, where they're 90%, US 2%, China allocation, you have reason to, if you if you care about diversification in your investments, then you're going to need to invest more in China. And this is also the reason that there is tension. So, you know, anytime you have a star athlete, and then there's an, there's a rookie athlete who's now becoming just as good as that star athlete, they're going to be competitive with each other. This is something that's not surprising, and it's also not going to go away. There's nothing wrong with it. It's just a fact of life.
Now directly to how this geopolitical tension can play out or you know, how it affects investors. I think, given that it is something that is there, and it's not going away, then there's the question, Well, does this create more risk somehow, and I think it can create more risk both in the US and China. I mean, it can create more risk for Chinese for US companies that rely on China somehow it can also create more risk for Chinese companies that rely on the US relationship, but I would say that for investors in China, if you're in an area that is not tech, so you know, so where it's not necessarily politically sensitive, China is only more and more welcoming of foreign investors. And we've seen that really consistently in the last five to 10 years. So as China tries to become more like the US and size and scale, they also are more and more welcoming of investors, and they really want to be viewed as a place that's safe to invest that you can make a healthy and fair return. And so as they have aspirations to become more like the US, they're, you know, they're going to make their, for instance, their stock markets, they're going to try to make it more and more like the New York Stock Exchange, they're going to make other aspects of investing in China more and more friendly. And we've seen that for some time now that that that that's happening. So I think not the reason I kind of carved out tech as an as an exception is that as the US and usually these tensions start with the US, by the way, so again, I'm American, I can speak in an unbiased way, I think about, you know, the the missteps of the United States, the US has been making it more difficult for Chinese investors to invest in US tech, they're being more protectionist. And China's going to respond in kind. So when the US does something, usually, at the very least, to save face, China will do something similar in response. And so this tension will continue. And it'll kind of depend, you know, how aggressive it gets will will probably depend on on how aggressive The United States is, because usually China is not the first mover in in an aggressive relationship.
Yeah, really looking forward to how this growth will work out. And there's no doubt that China is becoming more and more international player and a competitor in economic fields. Alright, Ben, now that we've kind of rounded off the first part of the interview and pick your brain on your experience with doing business in China, we would like to get to know you a bit better also on the personal level, with a couple of lightweight questions in our fire round. So we will ask you a couple of quick questions, and we'd like to ask you to answer it really quickly. So in one sentence, you don't have to think about it's wise, just say the first answer that pops up in your mind. So here we start.
sounds dangerous. Sounds riskier than China. But yeah, I'm sure you can handle it. Alright. What is your morning coffee order? Black, nothing in it. All right, then what book are you reading right now? Oh, what book Am I reading right now? I'm actually reading louses data Jing in Chinese. So this is the I don't know how to say it in English, but the original Dallas book from about 2000 years ago, impressive. Read, if you could solve one problem in the world, what would it be? The problem I would solve would be fear. So human fear, I think is the cause of most of the suffering in the world. So like, for instance, in aggression, or any argument, or, you know, insecurities. And I think that really is the root of, you know, people say, I'd like to have world peace. But I think I think in order to have something like world peace or peace in your family, you need to solve the issue of human fear first, and that will ultimately do that.
Okay, and please Name three traits that make a successful GP. Okay, so the number one thing is something that I think people don't always recognize, which is the ability to navigate the issues of human beings. So this is within the company, being able to create a positive culture and deal with provide solutions to human problems, like, you know, disagreements or differing views on things. And so just like any company or organization, like number one is the most difficult thing as human beings. And the best thing in the world is human beings. They're very complicated. And so, number one, a GP would need to be able to have like, that's sort of human sensitivity to be able to kind of manage their human capital. That's number one. Number two, I think, is an ability to think independently. So because what the news says or what your competitors say, or kind of what is the flavor of the month, I mean, these are all things that can be very dangerous, because if you kind of follow the lemmings off the cliff, that's what will usually happen if you care too much about what the guy next door. Thanks. So you have to have your own independent judgment. And the third thing is, I think self awareness. So being aware of your own weaknesses and what you don't know, you know, being aware of where your limitations are in terms of how much do you know and due diligence on a company, for instance, I mean, just not fooling yourself that there are things you don't know and there are even things you don't know that you don't know that you don't know. And so these are all like things that you know, self awareness is, I think, really vital.
Okay, great. Now pulling it into even a shorter questions span, we just want to finish off with asking you whether you think a number of topics are either overrated or underrated. So no explanation required. Just whatever comes into your mind at the beginning. Alright, I'm going to ask do you think that the following underrated or overrated
Cryptos?
overrated.
Karaoke?
underrated.
Twitter?
That's a hard one. For me personally, overrated. I've never had a Twitter account.
SPACs?
I think it's overrated right now. But I do think financial innovation. It's really hard for me. But okay, so it's overrated right now.
Okay. What about bubble tea?
That's probably underrated.
Yeah, and artificial intelligence?
At this point, I think underrated but ultimately, yeah, I'd say under that's probably underrated. Ultimately, if we think in in terms of centuries, okay.
And finally, Silicon Valley?
Oh, that's where I was born. So but I, that's so hard. Silicon Valley is overrated. That's hard for me to say since I was born there, but alright.
Ending
Yeah, that's right. Okay, Ben. Well, that that was it for today. We just want to thank you for a really insightful conversation around a region that I think perhaps a lot of our listeners don't know enough about. So we really appreciate you sharing some insight into the inner workings of China and your experience. Yeah, yeah, absolutely. So happy to do it. And thank you for the interesting and fun conversation. Thanks a lot. Bye, Ben.