Asia Pacific distress still pays off

Practitioners in the space speaking recently to a predominantly US audience at the Universities Club in New York collectively concluded that they may be more plentiful than ever.

The real level of distress

As a starting point, Anthony Miller, CEO of Pacific Alliance Japan, noted that there are currently relatively few distressed players of note left standing in Asia. But Grant Kelley, head of Asia with Apollo Global Real Estate Management and veteran of regional distressed real estate opportunities, pointed out that this leads to “significantly more pricing power on deals than is the case in other markets, where there is deeper competition.”

The number of Asia Pacific distressed private equity firms is about one quarter the number in the US as a ratio of regional GDP, Kelley conceded. He cited, as an example, a recent distressed auction in Atlanta where there were some 40 bidders. By contrast, even at the height of the Korean distress cycle in the early 2000s, there were perhaps three or four participants. And today that has dwindled to an average of two.

Even so, in Kelley’s view, this is an advantage for distressed investors that are active. “That means that you’re not leaving any of your investors’ money on the table by bidding away value.”

Driving distress

Rob Petty, Managing Partner and co-founder of Clearwater Capital Partners, outlined why investing in Asian debt should be considered now when there are so many Western opportunities supposedly on offer.

“The consistency of crises is one point. The number of these that we, the world, have to confront, plus those specific to Asia, is surprisingly large. I think people tend to forget that maybe stability isn’t really the norm.

“There’s also the scale of the opportunity, which can be hard to quantify. But it’s roughly an $18 trillion debt market, excluding Japan. [That] puts the default rate at approximately 2.5%, which means a $500 billion opportunity set.”

Another factor is the risk premium, where there are signs of a reset in investors’ opinions. For the first time, I think LPs are starting to look back and say, “Maybe the 500 basis points we’ve always asked for over the US and Europe isn’t appropriate. I’d argue that, in economies that are really growing, and don’t have the fiscal deficits of the Western world, that needs re-thinking.”

The ‘growth’ cycle

Exits energized by growth are the norm for players in Asia. And even when they are not – as in Japan – the prospects can still be attractive, according to 16-year veteran Tony Miller. “There’s no growth in Japan. But we have a big and successful business there, because it’s a large economy that is not very well banked, and that has many ‘dis-economies.’ For instance, I can buy a $500 billion portfolio of Japanese distressed debt with maybe 300 credits in it that I wouldn’t be able to find anywhere else in Asia – or in the US for that matter.”

China has been the region’s chief driver of growth and as Kelley points out, “with any distress investment, [there is] always an endgame of growth. Distress, in a sense, is only the first part of the equation. The second part is exiting into a growth cycle.”

As Miller says, “it’s very difficult to invest in distressed real estate when you think there’s a bubble, because you know asset prices are coming down.” But he believes that China “is going to suffer a significant downturn … Navigating that over the next couple of years is going to be a very important part of business for all of us.”

Emerging opportunities?

Further south, Australia is also full of opportunity, according to Kelley. “We very much focus on markets where, as a prelude to a distress opportunity, there has been a banking sector recapitalization. These almost always come after a government-driven or an internationally-driven re-cap of banks which provides enough of a cushion in their capital accounts to truly mark assets to market”.

Down Under, Kelley identified “a really scalable opportunity which will require the local banks to be key sellers. That’s grown out of a very successful program that was in play most of 2009.” And by the same token, “We’d like to see the same thing occur in Japan.”

In general, despite Asia’s impressive resilience post-GFC environment, the scale of the distress it has generated is on par with, or even exceeds, the levels of 1997-98, Kelley emphasized. “Furthermore, it’s occurring at the same time that Europe and the US are recessed. Thus, the truth is that there is less capital pursuing the Asian debt story now than there was ten years ago. And that’s remarkable.” 

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• Topics
• Credit/Special Situations
• Performance
• Real estate
• Real estate
• Grant Kelley
• Robert Petty
• Clearwater Capital Partners