Family offices, wealthy Asians seek distressed asset exposure
As tightening credit conditions in Asia increase the range and number of distressed opportunities, investors are seeking greater exposure, while acknowledging the risks.
“Distressed debt and real estate as well as fund secondaries are presenting interesting opportunities to invest at reasonable valuations,” said Kanu Gupta, chair of the recently launched Singapore branch of TIGER 21, a network of ultra-high-net-worth individuals (UHNWIs) collectively accounting for $150 billion of assets in 46 countries.
TIGER 21
Growing investor appetite for distressed investments is being matched by a wider range of opportunities, as a more conservative lending approach by the region’s banks – which has resulted in higher interest rates on loans and lower loan-to-value ratios – increases opportunities for non-traditional debt and equity providers.
REFINANCING DEMAND
Neil Brookes, global head, capital markets, Knight Frank, said that an important source of distressed debt opportunities was presented by assets first financed 2018 and 2020 -- when interest rates were very low -- that must now be refinanced, at significantly higher rates.
“Similarly, closed-end funds within this timeframe will necessitate divestment or asset refinancing.
"With valuations being driven down in the past year and the increased need for some owners to divest their assets, this has led to the expectation that there will be more opportunities to acquire distressed assets at prices below valuation as well as for investors to enter in the private credit debt space to provide alternative financing,” he said.
“These opportunities can come in the form of credit/debt provision or going into fund secondaries to bridge the capital gap,” said Joe Kwan, managing partner at Raffles Family Office, referring to the private equity secondaries market where parts of private equity funds, such as a stake taken in a private company, are traded after a fund has closed but before it matures.
But he emphasised the challenges entailed by the sector and the need for expertise on investor teams, which, in practice, can limit the range of opportunities.
“Distressed opportunities are always appealing but one has to consider the attached risk and the level of access. Whilst many can claim their rights to such opportunities, the reality is that access is often limited.
"In addition, there must be matching skillset to provide proper due diligence on such deal given its high-risk nature,” he added.
The growth of both the demand for and supply of distressed debt opportunities is a function of investors’ growing participation in private credit markets in recent years in the face of banks withdrawing from lending – a trend that shows few signs of abating.
PRIVATE CREDIT GROWTH
“There has been a growing interest in setting up private debt platforms in the region among many of the larger, well known international private equity fund players," said Spencer Park, special counsel in the Seoul office of Milbank LLP and a member of the firm’s global corporate group.
"I’ve had several inquiries from various such fund managers exploring if and how they can establish a private debt platform in Korea and Japan to take advantage of an anticipated liquidity crunch in these markets in the coming year,” he added.
“As traditional lenders turn restrictive in an uncertain global economy, financing gaps emerging in the higher-for-longer environment have created favourable conditions for the region's private credit market to grow. Expanding private credit opportunities – a crucial segment in the real estate investment ecosystem – will further develop real estate capital markets in the region,” added Knight Frank's Brookes.
Certainly, expanding demand from borrowers is important, noted James Macdonald, head of research and consultancy at Savills China in Shanghai.
"It used to be that most assets could be financed, there was no need for private debt."
Investors would do more if regulations allowed, according to a survey of private debt and trade finance professionals by the securitisation-as-a-service provider, Tradeteq, published in February.
About 63% of those surveyed said regulation and compliance was the primary barrier to investment in private debt.
The survey suggested the sector was likely to grow, nonetheless: 86% of respondents said that investors were likely to add trade financing to their arsenal, moving this facility beyond the current domination by banks and alternative lenders.