Against this backdrop, however, opportunities are emerging for cash-rich funds looking to deploy into Asia. Indeed, historically, some of the best deals were conducted during crises, both in Asia and globally. This is because there were higher quality deals at lower entry multiples, which in turn tend to produce superior returns, explained V Shankar, Partner and CEO of Gateway Partners.
In a recent presentation, consultants Bain & Company noted that the share of special situation deals increased during the global financial crisis in 2008 and 2009, to around 11% and 16% respectively, from 10% in 2007 and 6% in 2006. This time around, private investors are also flush with cash.
PE strategies for the win
A distressed asset could be a company that has short term cash flow problems, but the business is still fundamentally sound. The business, faced with liquidity issues, needs a fresh injection of capital to tide it over. On the other hand, for companies that operate in industries that have been hit hard by Covid-19, such as retail, energy, entertainment, tourism, or tech startups, liquidity problems have become a question of solvency.
There are generally three ways to participate as a distressed investor, according to David Chew, Partner and Founder of DHC Capital, a Singapore-based consulting firm focusing on restructuring and special situation deals. Those include investing in secondary debt or fulcrum security; distressed M&A or the acquisition of assets from a distressed seller; or participating as rescue financier to save the company or provide loans on a super-priority basis to fund the company.
Despite the crisis, private equity, special situation, and credit funds are armed with hefty amounts of dry powder and are actively looking for investment opportunities, said Chew. A report by Bain & Co in March 2020 noted that some $388 billion of dry powder for private equity strategies was available in the Asia Pacific.
Some global strategic players are also opportunistically looking for deals, he added.
Meanwhile, given that exit timelines are likely delayed amid dismal market conditions, and LPs could be looking for liquidity, secondary transactions could be up, said Gateway’s Shankar. Buyout activity could also rise as a result of business consolidation in various sectors.
“Given the low-interest rates which are likely to persist for a while and the hunt for growth and diversification, PE will continue to be robust…for distressed assets, as well as for private debt, given the capital shortage,” Shankar added.
Apart from the PE managers, there is also increasing interest from family offices in distressed assets, beginning at the end of last year, said Saw. Compared to other investment funds, the family offices benefit from being very patient capital, as they manage their own money and take a much longer-term view.
Family offices are also often opportunistic and usually have their own very deep network within the countries where they operate and are often shown deals first before anyone else, said Matthew Gorman, Partner of ReedSmith. “They are less likely to be involved as a white knight rescue financier and having to negotiate hard and roll-up sleeves against creditor groups, “said David Chew from DHC Capital.
A favoured sector for family offices is real estate, and assets such as industrial property or real estate developers that are for sale at a discount would likely be snapped up. “Because it’s easier to calculate the valuation and you can see the real product of it. But they may want to get a big discount,” an industry lawyer said.
Finding the best-distressed assets
As economic activity ground to a halt and financial markets plunged, headline cases of collapse include that of Singapore-based oil trader Hin Leong Trading, which defaulted $4.25 billion in debts; and airline Virgin Australia, which is seeking court protection for more than A$7 billion of debts. There was also an online grocery delivery startup Honestbee, which eventually wound up after more than a year of cash burn and struggle.
Virgin Australia has attracted a slew of suitors – reportedly including private equity houses Cyrus Capital, Bain Capital, Indigo Partners and BGH Capital. But it remains to be seen if other businesses in distress are attractive to investors.
The ability to turn around the distressed asset or business depends on the regulatory, or other opportunities that have been identified by the fund, said Gerald Licnachan, Partner of ReedSmith.
For investing in secondary debt or fulcrum security, the key is entering the right part of the capital structure. When it comes to distressed M&A, investors need to identify performing assets that distressed companies have to urgently sell to raise capital to pay creditors.
Despite many available distressed assets in the market, PE or other investors will need to focus a lot more on asset quality, as well as to understand the basic resilience of the sector. “Importantly, also look for more downside protection,” Gateway’s Shankar added.