Rethinking Asia

As the Asian economy recovers and competition for distressed opportunities grows, players are rethinking their investment strategies in the region. By Aaron Lovell.

Asia may have played host to an ongoing fire-sale for years now, with institutional investors snapping up non-performing loans and bad debt – and achieving handsome rewards for their efforts. Many have been inspired by distressed success stories in Korea and Japan, where investors including Lone Star Funds, Ripplewood Holdings and The Carlyle Group have chalked up impressive returns in the wake of the 1997 financial crisis.  

But even as the region’s economies strengthen – something that no doubt helped investors such as these register outsized returns and make splashy exits – new players, including hedge funds, are also looking at distressed opportunities.  

Major investment firms Morgan Stanley and JP Morgan have recently said they were looking beyond the distressed debt sector for their Asia strategies. JP Morgan Special Situation Group head Christopher Nicholas told the International Herald Tribune last week: “You’ve got lots of capital chasing few opportunities. The returns have collapsed.”

The head of Morgan Stanley’s property arm also announced last week that the firm would no longer buy NPLs in China, as prices have become too expensive. Complications from the Chinese government, which affords bidding advantages to its state-owned banks, were also cited as a motivating factor in the move away from the sector. So while China remains saddled with bad debt portfolios, Morgan Stanley last invested in such portfolios in 2003.

There is also increased competition from domestic players. In China, state-owned financial institutions, with a lower cost of capital, have an advantage over foreign firms – a factor cited by Morgan Stanley for its move away from NPLs. At the same time, more than 60 hedge funds reportedly set up shop in Asia in the first nine months of 2005, compared to 15 in the same period last year, according to hedge fund tracker Eurekahedge. The new entrants are no doubt turning up the heat.  

Morgan Stanley is now reportedly planning to redouble its investments in the real estate sector to compensate as the firm moves away from distressed debt. Other NPL buyers, including JP Morgan, are reportedly looking into strategies like unsecured debt, restructurings and private equity investments. 

In addition to traditional distressed opportunities, real estate-related opportunities have also drawn interest as well – notably in India. For example, New York-based distressed investor Wilbur Ross is launching a joint venture with Housing Development Finance Corporation (HDFC), India’s largest mortgage finance institution, to make investments in distressed assets and NPLs, in addition to restructurings and turnarounds, on the Asian sub-continent.

But even the Ross vehicle is keeping its investment strategy flexible, focusing on a variety of special-situations plays, like corporate restructurings, bankruptcy, reorganizations, corporate spin-offs, privatizations, illiquid secondary stakes, cross-holding stakes and non-performing assets.

Despite steeper costs and more competition, there are certainly still distressed plays in Asia, particularly for those with diverse strategies and flexible geographic mandates.