mCapital goes on the hunt for distressed assets

The vehicle will target distressed and special situation assets in both Asia and Europe, with its preliminary focus largely on Asia, Devonshire told AVCJ. This mandate may shift following subsequent funding rounds. mCapital looks to make its second close in June, toward its $200 million year-end target.

Now is the time

Devonshire, who formerly led the Merrill Lynch Hong Kong and London Principal Credit Group, says that the vehicle’s fundraising success was due to Western LPs looking to expose their portfolios to Asia’s capital markets and the availability of distressed opportunities. The $74 million of the fund’s seed capital has been equally committed by Netherlands-based LP IMQubato and Italian fund of funds Advanced Capital.
These LPs signed onto mCapital’s fund amid an arduous fundraising process taking place at the height of the financial crisis. According to Devonshire, despite the appeal distressed and special situations investing held during the GFC, due to a growing cache of opportunities paralleling the worsening economic landscape, fundraising on the whole was difficult at best.

In fact, mCapital had hoped to announce the launch of the European & Asian Special Situations Fund sooner, but two of its major LPs had themselves faced difficult circumstances and were forced to pull out of the deal. One of these was said to be London-based hedge fund Harbour Capital, which closed in April 2009 after running out of capital, reports at the time noted, coming roughly a year after its launch.
“We had it in mind to separate from Merrill three years ago, so it wasn’t a sudden reaction. Around 2006 and 2007 the world wasn’t under pressure by the crisis, but we could see that event coming,” Devonshire told AVCJ. “However, when we started to get out there, the source of capital had completely dried up by 2009, and clearly we were looking for capital that had already been locked up by investors, and what we were seeking was way beyond most suppliers of capital’s capabilities by that point in time.”
But mCapital’s persistence paid off, and Devonshire’s fund has already made four investments, three of which are in Asia. mCapital has additionally committed to another three, and is currently in negotiation with vendors. The fund’s investment strategy includes a two-and-a-half-year holding period for companies, which is shorter than the average PE cycle but gives time to effect the turnaround. The average investment size is likely to fall between $3 million and $5 million, and the European & Asian Special Situations Fund will look to make 10 to 20 investments in SMEs across Asia and Europe, which Devonshire said has appealed to LPs looking to ramp up their exposure in Asia.

Devonshire specifically said the LPs he has been in discussion with are largely European, as US fund of funds with a special situations mandate have been very inward-investing, and Asian investors await more success stories in the space before committing their capital. This may have presented hurdles during mCapital’s initial road show but Devonshire said this has also highlighted a niche in the market.
“There are less than half a dozen distressed managers focused on Asia, and there has been money dripping in form the US and from Europe from investors looking to boost their exposure,” he said. “There is still a credit crunch in Asia, and for sure Asia is in a much, much better shape than Europe and US in light of the crisis, but there are always companies that go bankrupt. These are good companies with bad funding strategies, and while there are plenty of bad companies with bad strategies, we’re hoping our due diligence will prevent us from investing in those.”

Finding the opportunities

However, others say that there are few distressed fund managers in the region because Asia’s special situation landscape is too small to support more. One Southeast Asia-based GP told AVCJ that the distressed market is “basically non-existent” in Asia, and GPs won’t find LPs “desperate to do these sorts of deals.” Another Greater China GP also told AVCJ that, when he has looked at deals in the category, he has not found any to be very be compelling.

Co-Head of Paul Capital Asia Jason Sambanju told AVCJ that there are opportunities in the special situation investing, but a question of quantity remains. He says that companies in Asia tend to be under-levered – a situation which does not lend itself to distressed – or “buyouts gone wrong.” Yet, when Asia’s buyouts combust, the deals are largely too extreme to be fixed through private equity.

Despite the market chatter, Devonshire has faith that between the companies looking for refinancing, that are stressed or are in need of financial or managerial restructuring, mCapital will be able to successfully make investments. In fact, Devonshire said mCapital is so confident in its mandate that, “plans for Fund II are already on the launch pad.” 

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• Topics
• Fundraising
• Credit/Special Situations
• Merrill Lynch Global Private Equity