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The winning strategy for distressed asset investors

The winning strategy for distressed asset investors

Multiple reasons make India an attractive destination for stressed assets investors and special situation funds; the most primary aspect is the emerging clarity on the regulatory landscape and jurisprudence.

The Insolvency and Bankruptcy Code (IBC) would go down as a watershed moment in the corporate resolution process The Insolvency and Bankruptcy Code (IBC) would go down as a watershed moment in the corporate resolution process

The COVID-19 pandemic has played out as a catalyst in accelerating India's stressed assets market's growth. According to the latest numbers available, the Gross Non-Performing Assets (GNPA) of the scheduled commercial banks are estimated to increase to 11.22 per cent by March 2022. This indicates a steep rise of ~50, up from 7.48 per cent as of March 2021. This makes India an ideal target for stressed asset investors and special situation funds alike, irrespective of their country of origin.

Multiple reasons make India an attractive destination for stressed assets investors and special situation funds; the most primary aspect is the emerging clarity on the regulatory landscape and jurisprudence. With its many twists and turns, the Insolvency and Bankruptcy Code (IBC) would go down as a watershed moment in the corporate resolution process as it changed the credit culture and the way capital and businesses are managed in the country.

This regulatory clarity gives the much-needed impetus on the resolution of banks’ bad loans and the corporate restructuring process luring domestic and global strategic and financial investors to the market. They realise the potential for investments in India, both through IBC and outside IBC, i.e. via out-of-court settlements.

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However, investors in India’s stressed asset market are still weary of a few issues such as asymmetric information that may lead to future litigation. The information asymmetry mainly stems from unfair practices by the sellers who withhold or fudge critical business-related information such as financial details, assets under question, sustainable debt, cash flows, EBITDA margins and other financial variables from buyers. The net effect would be a valuation mismatch leading to future litigations.

Other aspects that have kept the investors and funds at the edge of their seats (always on the lookout for acquisitions) is sector attractiveness and substantial supply of stressed assets. The potential of growing the value of assets after turning around the business is another attraction.

Arguably, many deep-pocket investors prefer stressed asset investments because of their inherent `buy low-sell high’ potential and `low correlation’ to other asset classes. On another note, funds deployed in special situations investing for acquisition need to be patient, long-term capital. Many assets in the stressed category need a longer time horizon to turn cash flow positive as their internal rate of return (IRR) is staggered for a more extended period. Therefore, investors' staying power in the buy-outs of long-term investments would count as much as the cost of capital of the funds they raise for the takeovers.

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Undoubtedly, there are considerable opportunities to generate high IRRs in India’s stressed asset market provided the investor displays courage and conviction to take a swift decision because investments in this asset class come with many risks not limited to legal, operational or valuation perspectives.

Therefore, considering the complexity of factors detailed above, it may be advisable for them to navigate through the process with the aid of a focused expert who can be a catalyst. An advisor with an in-depth understanding of the entire regulatory ecosystem coupled with sectoral expertise, business understanding, and the ability to bridge the gap between lenders priorities and borrower mindset can be a game-changer. That would help investors get ahead in India's stressed asset market.

Views are personal. The author is Managing Partner, Brescon & Allied Partners LLP.

 

Published on: Nov 03, 2021, 1:27 PM IST
Posted by: Arnav Das Sharma, Nov 03, 2021, 11:55 AM IST