APAC private debt managers search for distressed debt opportunities

More special situations and distressed debt managers raise capital to access arising opportunities in the market 

In the wake of recent bank collapses, distressed bonds and loans have increased by $69bn globally, predominantly in the US and Europe. At the same time, private equity firms have started to buy loans that fund their own buyouts, as banks offer discounts to offload bad debts. Such events present opportunities for distressed debt funds to deploy the high levels of capital raised in recent years.

Distressed debt fundraising peaked globally in 2020, when a record 47 distressed debt funds closed, raising $45.8bn (Fig. 1). Activity of a similar strength was seen in 2021, with 47 distressed debt funds raising $44.7bn. The aggregate capital raised in either of the two years was more than double the full-year figures achieved between 2017 and 2019.

Investors are on the lookout for opportunities, especially as the rise in non-performing loans continues. As a way to access these distressed debt opportunities, special situations and distressed debt funds have started to surface in APAC. 

Previously, APAC-based private debt fund managers preferred to invest in distressed debt opportunities through special situations funds, which allow them to employ blended strategies. Special situation funds capitalize on events that cause securities to trade at lower valuations. They can loosely be used to acquire distressed debt, which are discounted, high-risk debt securities in default, or which bear a significant chance of defaulting. Seven APAC-focused special situations funds raised $5.8bn in 2022, doubling the $2.5bn raised in 2021 (Fig. 2). The difference was driven by two significant funds, Bain Capital's Special Situations Asia II and Asia Pacific Special Situation Fund, which closed at $2.1bn and $2.0bn, respectively. According to Bain Capital, the Special Situations Asia II fund has an opportunistic mandate, pursuing special situations and distressed debt in China, India, Australia, and South Korea. 

There are also seven pure-play distressed debt funds in the market focused on APAC currently, aiming to raise a total of $1.5bn. The largest two funds are JC Flowers India Opportunities Fund and ShoreVest Credit Opportunities II, both aiming to raise $500mn each. JC Flowers has recently completed purchasing Yes Bank’s non-performing loans with a principal balance of approximately $6bn. Meanwhile, ShoreVest specializes in asset-backed opportunistic credit, primarily investing in cash-flowing real estate in China. According to its website, it has managed over $2bn in distressed debt and special situations investments in China.

Recently, Singapore-based fund manager Point Hope has also announced a partnership with debt servicer Longan Group to form a funding platform that will acquire, service, and restructure unsecured consumer credit in Vietnam and Indonesia.

Investors looking for opportunities in different places

Distressed debt investors such as Oaktree Capital Management and Davidson Kempner Capital Management have swooped in to purchase distressed bonds from Adani Group’s companies. This is in the wake of a report published by US short-seller Hindenburg Research in January, which stated that the firm took a short position in Adani Group companies through US traded bonds. 

Other distressed asset managers were on the lookout for opportunities in the wake of China’s real estate crisis, precipitated by the introduction of Beijing’s ‘three red lines’ policy in 2020, which limited banks from lending to overleveraged real estate developers. However, such hopes did not materialize. Chinese banks would rather write down or dispose of non-performing loans, or transfer them to state-run asset managers, making it difficult for independent distressed debt managers to price and acquire bad loans. Lenders sold RMB 2.7tn in non-performing loans in 2022 , with delinquent debts being absorbed by state-owned distressed asset management companies.

Across APAC, there will be more opportunities for distressed debt investors to purchase debt at discounted prices, especially as more companies face the prospect of restructuring and bankruptcy. However, in contrast to Europe and North America, where there are relatively more distressed debt funds, this style of investing may be carried out by special situations funds in APAC instead. 

The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.