REAL ESTATE NEWS

HOW ONE FUND HAS CRACKED THE CODE ON DISTRESSED DEBT INVESTING

Published on Tuesday, February 23, 2021

There are currently a record number of distressed debt funds in the market, causing an imbalance between the supply of distressed debt and available capital.

 

In 2020, a record amount of distressed debt flooded into the market to chase illiquid investments. The trend has triggered an imbalance between the supply of distressed debt and available capital for these deals, creating an ultra competitive market for funds interested in these assets. Writing for Preqin, Andrew Amos, director at M&G Investments, explains their particular approach: they are continuing to target distressed debt opportunities while understanding that they may take time to materialize.

Following the Great Financial Crisis, M&G Investments found that corporate stress remains long after the initial economic impact. In fact, M&G Investments was finding opportunities yielding 15% p.a. from corporates six years after the 2008 recession.

Based on that experience, Amos laid out the key ingredients to finding success as a distressed debt fund manager. His top tips include broad and effective market tracking—meaning that fund managers must leverage their network to find all opportunities that don’t necessarily hit the mainstream radar; a specialist view from inside the deal that can give a better roadmap of the restructuring; full set of restructuring skills, such as accounting, credit, legal, and the hands-on experience; and a network of industry specialists and experienced board directors to get crucial information on the specialized industry required for operational restructuring.

Amos acknowledges that distressed debt investment is high risk, but he also says that there are strategic ways to reduce the risk profile. M&G Investments focuses on investments where the risk is credit and execution of the restructuring and the turnaround. “In the vast majority of cases we only invest in opportunities where we can influence the restructuring process and exercise control during the turnaround phase,” says Amos. “This allows us, to a large extent, to be in control of our own destiny.” In addition, they only invest in projects that have a Plan-B to hedge against the potential downside.

Following the COVID-19 pandemic, Amos says that the next distressed debt cycle will be driven by payment defaults. This will happen once government support ends. When that happens, many companies will have an urgent need for capital intervention, which will lead to financial restructuring. Government intervention will slow down distressed opportunities in the near term, but Amos doesn’t expect the funding to have an impact on opportunities in the mid- to long-term.