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Fund to target share-backed company loans

Using company shares as collateral, a private debt fund will lend to Hong Kong-listed companies, something private banks used to do, according to Ching Ching Lam, chairwoman of Charismatic Capital.
Fund to target share-backed company loans

Hong Kong abounds in small and medium-sized listed companies that are still tightly controlled by their founders, Lam told FSA. Such individuals and their companies frequently find themselves short of cash to run their business, and are willing to borrow against the equity in the company they own.

Lending against shares used to be a big business for private banks. However, after the 2008 financial crisis they’ve scaled it down drastically, faced with tighter balance sheet regulation and capital requirements. “They don’t have the resources and balance sheet to cater to smaller companies,” Lam said.

This created opportunities for private lenders and Lam thus established Charismatic Capital in 2014. Previously, she was employed in private banking in Singapore, in firms such as Citibank, CIC and UBS, according to the firm’s website.

Now, after running the business for four years, she has established a private debt fund based on the same model that will help her meet what she hopes will be strong demand for such loans in Asia.

PE structure

The structure of the Charismatic Debt Equity Fund resembles that of a private equity fund. It has an investor minimum of of $1m and targets high net worth individuals. It provides quarterly liquidity, a three-year lock-up period and charges management fees of 2% per year plus a 20% performance fee. The fund is targeting its first close for June 2018.

Lam’s fund, at least at the beginning, will be essentially a one-person operation. While she employs three assistants and outsources fund management tasks to the Irish firm Quayside Fund Management, sourcing of the loans hinges on her own network of contacts developed during her banking career.

Lam aims to lend half of the funds she raises to borrowers in Hong Kong, while the rest will go to borrowers in Singapore, Indonesia and Thailand.

The loan, usually between $5m and $10m, is made against shares in the borrower’s company which are held in custody by the fund for the duration of the loan, up to three years. Lam lends up to 50% of the value of the shares, to provide the cushion against their fluctuations. If prices fall, she makes margin calls to borrowers to top up their collateral.

During the four years she has run this as her private business, she said only one loan defaulted out of 50 she made. From this default, she said that she managed to recover more than the value of the loan from force-selling the collateral.

Despite the ultra low interest rate environment, the borrowers from the fund pay between 10% and 15% interest, tied to Libor. She explained that the high interest rate reflects strong demand for share financing and lack of access to traditional bank lenders. Lam said she hopes to deliver a net return between 10% and 12%.

Part of the Mark Allen Group.