Distressed asset investment activity is set to grow in Asia, with private equity playing a more important role in providing finance and hands-on restructuring.
South Korea and Greater China should see most of the region’s growth in corporate turnarounds and restructuring, according to a new survey by AlixPartners, a global business consultancy.
Of the 150 lawyers, banks executives and fund managers in Asia polled, 66% say they expect to see an increase in business restructurings, with 25% expecting it to maintain current levels.
While banks have traditionally been the main source of capital for restructuring, private equity firms are increasing their involvement in the space, as there are numerous opportunities to provide capital to sectors that have been all but cut off from bank finance.
“Private equity is looking at lot of distressed situations in Asia and the rest of the world,” says CV Ramachandran, head of Asia for AlixPartners.
“Shipping is a perfect example,” says Ivo Naumann, who heads AlixPartners’ activities in China. “A number of banks have stopped funding shipping companies. And that really impacted [their ability] to survive.”
AlixPartners, which specialises in advisory for bankrupt and financially distressed companies, has a direct business link to private equity, as it is majority-owned by CVC Capital Partners.
Shipping was named by 27% of survey respondents as an industry which would require restructuring in the year ahead, compared to 76% for financial services.
However, shipping represents a bigger opportunity for PE. Alternative fund managers Apollo Global Management, Blackstone Group, Fortress Investment Group, Oaktree Capital, WL Ross and Centerbridge Partners have reportedly made investments in the sector.
Turnaround PE specialist WL Ross plans to invest about $1 billion into distressed shipping assets. This is a sector “where we see a great amount of opportunity”, says Stephen Toy, the firm’s managing director.
The industry has a massive oversupply problem, said Toy during the SkyBridge Alternatives Conference in Las Vegas earlier this month.
South Korea is home to four of the five largest shipping companies globally, and is also the world’s largest shipbuilder, potentially providing the most opportunities in the region.
Sentiment in the country towards private equity has changed in the past several years since South Korean regulators aggressively pursued PE firm Lone Star for taking profit on a turnaround of a domestic bank.
“The country is expecting that Korean private equity will help to restructure the companies,” says Yung Chung, head of AlixPartners’s Korea office, who did not comment on any individual sector.
In the future, Southeast Asia will likely emerge as a new playing field for distressed opportunities in the next two to three years.
“Some of the investments that are being made now in places like Indonesia, Philippines and Thailand seem to me to be quite speculative,” says Eric Thompson, Singapore-based managing director at AlixPartners.
“I would anticipate that those places in particular we’ll be seeing more problems. It’s just inevitable, in terms of valuations and very high expectations.”