Investors have a wider range of opportunities to participate in distressed and corporate turnaround stories as banks cut back on lending, says Ray King, Melbourne-based partner at Mercer.
The degree to which asset owners can enter such deals begins with their in-house experience and comfort level. “For investors, this requires a capable investment team,” says King. “That’s the differentiator.”
Michael Forestner, Atlanta-based partner and director for private markets, says it’s not clear how aggressively Asian investors are chasing such deals.
A sovereign wealth fund or other state-linked group can use a consultant such as Mercer for a variety of ways to go after alternative investment deals, from a manager database to advice on niche asset classes to full-on implementation.
He says an important difference between mandating a fund manager for public securities versus for private funds is understanding how the manager adds operational value, particularly if the target company is in distress.
“Managers benefit from restructuring distressed debt through process risk in which the GP adds value by influencing the process," he says. "You need to know what levers are being pulled at the underlying fund level.”
King joined Mercer last month to lead its private equity and hedge fund efforts in Asia-Pacific, focusing on manager research, implementing client strategic allocations and related activity.
Before that he ran his own investment boutique in Australia, Sovereign Investment Research, providing global alternative investment research and advice to Australian superannuation funds.
The proliferation of managers made the job increasingly difficult and so he joined Mercer to take advantage of the firm’s global research capabilities.
Mercer in turn lacked analysts dedicated to alternative investments in Asia, so King and his ex-sovereign team fill that gap.
King predicts that distressed opportunities will develop in Asia as well as in debt-stricken Europe and the US. He expects to see more mezzanine and subordinated-debt fund managers appear, because this is a relatively less volatile avenue into private, illiquid investments.
“We’d like to see more managers of mezzanine strategies emerge from the region over the next few years, and gain experience in restructuring situations.”
One area that is already active is secondary private equity. “Banks are selling their legacy private-equity portfolios,” says Forestner.
Overall, distressed/restructuring stories are becoming a greater part of investors’ alternatives allocation – by as much as 40%, says King, as banks retreat from traditional lending operations worldwide.
Although capital is easier to come by in Asia, bank lending is going to be reduced here as well. Already European lenders are retreating from the region, and incoming Basel III requirements on reserve ratios will force Asian banks to cut lending levels gradually as well.
Insurance firms and other investors with large balance sheets and a track record in credit investing are beginning to step in. King believes there will be an opportunity for hedge funds and private equity funds to increase their activity in Asia, too.
Further down the road, King expects Asia’s clean tech and sustainable energy sectors to throw up a host of deals for hedge funds and private equity firms.
Today, however, for the biggest sovereign investors which can write a cheque for $500 million to $1 billion, the main opportunity is buying non-core assets from beleaguered European banks, although it may take three years for such deals to be realised.