Contrasting the Global Trend, Fewer Asia-Focused Distressed Debt Funds Are on the Road

While the number of distressed debt funds in market globally has swelled to a record high, debt managers in Asia prefer to market opportunistic investments through direct lending vehicles that employ blended strategies

Globally, private debt fundraising slowed in 2020 as investors pared back their commitments to new funds in a challenging economic environment. With a record number of distressed debt funds in market globally, though, final figures could catch up toward the end of the year. In Asia, however, the numbers tell a different story. As of the end of October, there are only three distressed debt funds in market, collectively looking to raise $1.3bn. As shown in Fig. 1 and Fig. 2, the number and target capital are on par with one year ago, but aggregate capital targeted is down 69% from the high of $4.2bn in October 2018. We look at data from Preqin Pro to find out where Asian debt managers are focusing their capital right now.

Distressed Debt Fundraising Stalls
The largest of the three Asia-focused distressed debt funds currently in market, India Resurgence Fund, was launched in 2016 by Piramal Enterprises Limited and Bain Capital Credit with a $1bn target. Value Partners Asia Principal Credit Strategy raised $90mn of its $300mn target at its first close in 2019, while Avenue Asia Special Situations Fund VI raised $154mn at its first close in April 2020.

Over the course of 2020, up to October, only four Asia-focused distressed debt funds have closed, raising a combined $102mn, down from $722mn raised by five funds in the same period a year earlier. All four of the funds closed in 2020 intend to provide capital to businesses that have been affected by the COVID-19 pandemic, but all are on the small side in terms of size. The largest, 2019 Typhoon and Novel Coronavirus East Japan Wide-Area Reconstruction Support Fund, secured $39mn.

On the surface, the weak fundraising by Asia-focused distressed debt funds so far this year suggests that fund managers in the region aren’t nearly as excited as their global peers about the ‘once-in-a-cycle’ opportunities created by COVID-19. But Asia is still a small and nascent market for private debt, meaning managers are typically less inclined to limit their investment options to one single, narrow strategy. Instead, many of the larger credit funds in Asia choose to pursue blended or diversified strategies. 

Debt Investing, Asia-Style
Even before the outbreak of COVID-19, most debt managers in Asia were operating like opportunistic debt funds: open to exploring a broad range of deals that may come up based on the relationships they have established or any mispricing that appears in the market, rather than committing to a single investing style. According to a recent report from the Alternative Credit Council, the majority of private credit managers in Asia tend to focus on special situations or opportunistic lending. That is, involving borrowers that require a non-commoditized finance solution, such as debt refinancing, project funding shortfall, or an immediate requirement for bridge financing. Some managers also invest specifically in non-performing loan portfolios. Typically, Asian private debt managers aim to achieve returns of 13-20% over 3-7 years, according to the report.

As of the end of October 2020, Preqin data shows five Asia-focused direct lending funds in market with a blended/opportunistic debt strategy. These funds have a combined fundraising target of $1.9bn. The largest of the pack is Tor Investment Management’s Tor Asia Credit Opportunity Fund II, which launched in April and has raised $243mn. The fund has a $750mn target and invests in opportunistic private lending situations as well as distressed assets.

Distressed debt investing is a very specialized business – it’s easy to lose your shirt if you’re not up for the challenge. Preqin data shows that distressed debt has underperformed other private debt strategies over one-, three-, and five-year horizons as of March 2020. One reason is that many of the larger funds have targeted larger companies that are facing serious issues like disappearing markets and industry disruption, which are difficult to bounce back from. 

This may change going forward, though. COVID-19 has improved the distressed opportunity set by bringing into the fold companies with otherwise sound business models that are experiencing short-term financing issues. Christopher Mikosh, Portfolio Manager and Co-Founder of Tor Investment Management, told us that “directly originated senior secured private loans at mid-to-high teens IRRs where the borrowers’ funding channels have been dislocated due to COVID-19 are proving to be the most attractive from a risk/reward perspective.” He added: “So far, the distressed portion of our focus has been rescue or super senior/DIP (debtor-in-possession) financings and we expect to see restructurings and NPLs in the pipeline over the coming quarters.”

Corporate debt restructurings triggered by the pandemic will be keeping debt managers active for a while. Those managers with a keen ability to source and structure deals will be the ones to capture the most value from the COVID-19 fallout.