KKR’s McVey expects China restructuring, recapitalization opportunities

Henry McVey, the firm's head of global macro and asset allocation - and whose views are therefore not an indicator of investment strategy - identified China restructuring as one of five macro arbitrages to follow in 2015. He expects this activity to focus on sectors that previously over-earned or overstretched their footprints.

Slower GDP growth is largely a product of reduced fixed investment in areas such as low-end manufacturing. While these areas contributed significantly to economic development over the past two decades, McVey suggests they will be less important going forward, with issues such pollution, water shortages and food safety now representing "potentially more contentious political issues than job creation."

"This priority realignment is a big deal because it means fixed investment and low-end manufacturing will be de-emphasized," he said in a paper released by KKR. "As such, we believe that investors should expect to see sizeable restructuring and recapitalization opportunities in sectors that previously over-earned and/or overstretched their footprints during the ‘China Growth Miracle' that defined the 2000-2010 period in the global economy."

It remains to be seen to what extent this translates into private markets deal flow. McVey's team remains of the conviction that, in an uneven growth environment, investors should consider allocating more capital to special situations-type investments.

However, while in the past the most opportunities were tied to corporate restructurings and deleveraging in developed markets, now there is increased focus on emerging economies, notably India, Indonesia and China.

"We see that many banks in the region are now carrying too much bad corporate credit and, as a result, there is a growing role for private lenders and restructuring professionals to step in and provide value-added capital to struggling corporations across a variety of sectors in the emerging markets," McVey said. "Importantly, we see this opportunity as secular, not cyclical, as credit creation in the emerging markets in recent years has been outsized."

He added that, in order to capitalize on these opportunities, investment firms - particularly those in the alternatives space - will need to overhaul their models, with the ability to move up and down the capital structure and provide partners with financial and operational expertise a priority.

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• Topics
• Restructuring
• Restructuring
• Greater China
• Credit/Special Situations
• Special Situations
• Distress
• China
• India
• Indonesia
• KKR