Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Asia struggles with private debt mandates
While distressed debt funds have mushroomed to record levels in major markets, helped by the belief that the pandemic is a once-in-a-lifetime opportunity, Asia has languished.
Already a small market for the broader private debt alternatives asset class, Asian distressed debt funds in the market for capital have declined over the past five years, from six in 2016 to three up until October 2020, according to global alternatives research house Preqin.
Special situations private debt funds have grown in number, from two to seven, and blended funds, encompassing direct lending and opportunistic investing, have gone from one to five.
Marissa Lee, a Singapore-based senior associate, APAC, at Preqin, said in a December blog that fundraising for private debt funds globally slowed during 2020, but there were still a record number of distressed debt funds.
In Asia, not only has the number of distressed debt funds declined, so too has the amount of money they are seeking to raise – US$1.3 billion (A$1.7 billion) for 2020 compared with US$4.2 billion in 2018.
Lee writes: “Even before the outbreak of COVID-19, most debt managers in Asia were operating like opportunistic debt funds: open to exploring a broad range of deals that may come up based on the relationships they have established or any mispricing that appears in the market, rather than committing to a single investing style.
“According to a recent report by the Alternative Credit Council (ACC), the majority of private credit managers in Asia tend to focus on special situations or opportunistic lending. That is, involving borrowers that require a non-commoditized finance solution, such as debt refinancing, project funding shortfall, or an immediate requirement for bridge financing. Some managers also invest specifically in non-performing loan portfolios.”
Typically, Asian private debt managers aim to achieve returns of 13-20 per cent over three-seven years, according to the ACC’s report.
As of the end of October 2020, Preqin data shows five Asia-focused direct lending funds in the market with a blended/opportunistic debt strategy. These funds have a combined fundraising target of US$1.9 billion. The largest is Tor Investment Management’s Tor Asia Credit Opportunity Fund II, which launched in April and has raised US$243 million. The fund has a US$750 million target and invests in opportunistic private lending situations as well as distressed assets.
“Distressed debt investing is a very specialized business – it’s easy to lose your shirt if you’re not up for the challenge. Preqin data shows that distressed debt has underperformed other private debt strategies over one, three, and five-year horizons as of March 2020,” Lee said.
One reason is that many of the larger funds have targeted larger companies which are facing serious issues like disappearing markets and industry disruption, which are difficult to bounce back from.
