Distressed investing gathers steam in Asia(2)

Distressed fundraising totals in Asia doubled last year, recording the highest amount raised since 2006 as interest in the region's distressed vehicles increases.

Distressed fundraising in Asia picked up significantly in 2012 as the region’s fund managers start to generate interest from investors, according to industry sources.

A total of $5.2 billion was raised across seven distressed funds for Asia in 2012, more than double the $2.2 billion raised across six funds in 2011, according to PEI's Research & Analytics division. 

Last year's totals were the highest since 2006, when distressed fundraising in Asia totaled $4.8 billion, according to additional figures from Preqin.

Shyam Maheshwari, partner at SSG Capital Management, which closed a second special situations fund in November on its $400 million hard-cap, suggested an improvement in distressed fund performance is helping to drive fundraising.

The returns from SSG’s distressed Asia portfolio showed a progressive improvement the last two years and thus the firm could show LPs more attractive numbers, he said. In 2011, the IRR for SSG's distressed portfolio was 20-23 percent, compared to 12-14 percent in 2010. The 2012 figure is expected to be at or higher than the 2011 numbers, he added.

The performance results also helped boost SSG's 2012 investments in Asia, which totaled $190 million compared to $70 million in 2011, he added.

Comparatively mediocre returns from distressed investing in the US and Europe for the past few years could be a push factor for some LPs, he said. “They are now looking to expose themselves more to Asia.”

He believes that a lack of IPO exits in the private equity Asia market is getting many investors worried about returns. Since distressed investing often does not take the IPO exit route, it is beginning to look like a more attractive investment option in Asia.

Melody Ing, vice president at Clearwater Capital Partners, believes the lift in the region's distressed fundraising is simply due to a continuing recovery from the lows of the financial crisis. In July, Clearwater closed its fourth fund on $575 million, below its $900 million target, according to PEI's data division.

Ing said that an attractive side to Asia distressed investing is that many target companies don’t have too many fundamental problems. “There will always be companies [in Asia] that are good companies, that are survivors, that are experiencing liquidity issues from overextended balance sheets and capex mistakes,” Ing told Private Equity International.

Even with increased fundraising, Ing is not worried about there being too much capital in the sector, because she believes there is still a lot of room in individual countries. She said that Clearwater would actually welcome more players to the industry, because in places like India more activity can raise the level of awareness of distressed investing.

Maheshwari believes that 2013 will also be a busy year for Asia distressed investing, but he doesn’t believe Asia will reach the investment levels of the US or Europe anytime soon simply because the market is too fragmented – distressed situations in one country don’t have as much impact on neighbouring countries.