Corporate Financing Analysis - Asia: The Next Frontier For Distressed Debt Funds - 20 NOV 2017

With plenty of opportunities and further upside potential available in the distressed debt space in Asia, funds are raising capital for deals at a record pace. Within this, we highlight a strengthening focus on the continent's two largest economies, China and India, within which debt levels - both corporate and personal - are becoming increasingly elevated. This represents a cause for much concern for the respective national governments in Beijing and New Delhi, as they are being forced to tackle the issue. However, it also represents a potentially lucrative investment opportunity for the global distressed debt funds which feed on such conditions and which are rapidly turning their focus towards Asia after having long been focused on investing in Europe and North America.

Funds In The Market

The evidence of this shift in focus towards Asia is more than just anecdotal: over the past decade, as few as 13 distressed debt funds which are focused on the region have successfully reached fundraising closes worth a combined USD4.4bn, suggesting that investors have not previously seen much opportunity for a return in Asia through such vehicles. Interestingly, seven of those funds closed over the last ten years were India-focused, while five had China in their sights. Fast-forward to the end of October 2017 and there were six funds in the market busy raising capital to acquire distressed assets in the region. Collectively, those six funds, which all have a focus on either India or China, are hoping to secure a total of USD4.8bn in fresh capital from investors. If successful, those fundraising targets would represent 62% of total Asia-focused distressed debt fundraising over the past ten years - Preqin data shows. The largest fund currently in the market is Shoreline Capital's 'Shoreline Capital CNY Fund', which is targeting a USD1,475mn close. We note that Shoreline's previous fund closes in 2008, 2011, and 2015 were valued at USD178mn, USD303mn, and USD500mn, respectively. If successful, Shoreline's most recent fundraising will represent its fourth fund targeting the region and (perhaps even more significantly) its largest by some distance. Moreover, it would rank as the largest China-focused distressed debt fund close on record, surpassing the USD1,094mn close of the 'Sunflower Fund', which was raised by China Merchants Capital back in May 2016. The largest India-focused fund close on record, meanwhile, was the USD1.0bn IFC-Apollo Distressed Debt Fund, which closed in April 2016 and which saw Apollo Global Management and the International Finance Corporation (IFC) both contribute USD500mn to the partnership.

Putting Capital To Work
2006-2017 Asia-Focused Distressed Debt Dry Powder, By USDbn
Source: Preqin Private Debt Online, BMI

This article is part of our Corporate Financing week coverage. To access this article subscribe now or sign up for free trial