Sometimes known by the unflattering tag of "vulture funds", investors in the distressed debt space have plenty of spare capital to put to work, with India and China featuring on their target screens.
Distressed funds that seek to profit by buying loans and bonds at a fraction of their original face value in the hope of a turnaround are building war chests, it appears from data showing busy money-raising activity in this space.
Preqin, the research firm tracking alternative assets such as private equity, hedge funds and property, reports that six distressed funds collectively raised $8.6 billion from 2014 to 2016, easily beating the $5.3 billion raised by just four funds from 2010 to 2013. In 2017, the organisation said that a “similar trend may be emerging in Asia”.
“Burgeoning concerns about corporate and personal debt in the region’s two largest economies, India and China, have raised the prospect that assets in these markets will become likely targets for distressed funds. As a result, although just 13 funds have closed focused on the region in the past decade, in October 2017 there are six vehicles raising capital to acquire distressed assets in Asia,” the report said.
Discussing the 13 distressed debt funds with a focus on India or China that have closed, the report noted that they raised $4.4 billion. And seven of the funds closed over this period were focused on India, while five funds targeted China.
The market is concentrated: of the five funds targeting distressed assets in China, three were managed by Shoreline Capital, raising an aggregate $981 million in capital.
The largest India-focused distressed debt vehicle closed in the past ten years was raised by Apollo Global Management. In fact, it was the only global manager to raise a distressed debt fund targeting the region over this period.
“With the institution of the Insolvency and Bankruptcy Code by the Indian Government in 2016, the bankruptcy process has been expedited, and it is expected that it will be more efficient for fund managers to acquire distressed assets. Concurrently, in China, years of economic growth have led to high levels of corporate debt and, as the rate of growth has slowed, the government has begun to ease the process for foreign firms to help reduce privately held debt,” Ryan Flanders, head of private debt products at Preqin, said.