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Abax Global Capital Follows CLSA With Chinese Private Equity Fund

Abax Global Capital Ltd., a Hong Kong-based hedge fund manager backed by Morgan Stanley, plans to start a private equity fund in China that invests in companies making environmentally friendly products such as clean energy.

The yuan-denominated fund aims to raise about 500 million yuan ($73 million) from Chinese investors by its first close in two months, Donald Yang, Abax Global Capital's Hong Kong-based president, said in a phone interview Aug. 21. It will be sponsored by a large Chinese financial institution, whose name he declined to reveal because of pending regulatory reviews of the plan.

International managers such as Blackstone Group LP and CLSA Asia-Pacific Markets are also planning to tap Chinese demand for local-currency private equity funds. Abax Global Capital is joining peers such as Income Partners Asset Management (NYSE:HK) Ltd. that are diversifying their product range and investor base after the worst year for hedge funds in 2008.

"Money is tight, so people will raise assets where they can," said Paul Smith, Hong Kong-based managing director at Triple A Partners Ltd., which provides startup capital to hedge funds and helps market them. "Everyone is having to learn new tricks to stay afloat."

Abax Global Capital, set up in 2007, initially focused on so-called special situations investments in companies involved in events such as mergers, acquisitions, asset sales and large share buybacks.

"Last year, most participants in the industry felt significant pain during the market turmoil," said Yang. "From a business point of view, having a single strategy is risky. What we're trying to do is to build a platform with multiple strategies."

Convertible Bonds

Abax Global Capital's $300 million special situations fund, which invests mainly in convertible bonds, notes and equity warrants, booked double-digital returns this year as credit markets rebounded and the quality of the company credits it holds strengthened, Yang said without giving specific numbers.

The fund was down "significantly" last year after the credit market slump forced it to mark down the value of its holdings, said Yang, declining to give a more specific performance number. The illiquidity of the fund's private investments made it difficult to value and sell the assets at attractive prices when the market collapsed, he added.

Income Partners, which oversaw debt and macro assets, started its first equity hedge funds in July.

Raising Money

Abax Global Capital in January raised about $50 million from a small group of wealthy Chinese individuals for funds that focus on publicly issued, frequently traded high-yield and convertible bonds, Yang said. The funds have returned at least 30 percent since inception, profiting from the doubling of some companies' bond prices since mid-March, he added.

"We were lucky enough to raise capital at the beginning of the year and chose attractive positions that benefited from the up trend of the credit market," Yang said. "Otherwise, if you are holding positions that you bought a year or two ago, you may not have experienced as much of the overall benefit in the recovery."

Neo-China Land Group (Holdings) Ltd.'s convertible bonds maturing in June 2011 traded as low as 22 cents on the dollar in February after missing a coupon payment on $400 million of high- yield bonds in January. The convertible bonds have recovered to 62.5 cents, according to data compiled by Bloomberg.

Hopson Development Holdings Ltd.'s convertible bonds maturing next year rose from 32.3 cents in November to 96.8 cents on the dollar, according to Bloomberg data.

New Hires

Abax Global Capital, which manages about $560 million, also opened its Tudor Investment Corp.-backed Asia macro fund, which seeks to profit from regional economic trends, to outside investors for the first time.

Abax Global Capital is hiring at least three people for the Chinese private equity fund, said Yang, who helped found Abax Global Capital and was a former head of Hong Kong and Greater China debt capital markets at Merrill Lynch & Co. Abax Global Capital's special situations team will assist the fund's management, Yang said

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.