- Global NPL and distressed assets present a promising opportunity for investors looking to diversify their portfolios.
- A forum at the Annual Investment Meeting explored how rising interest rates are creating opportunities for distressed debt investors.
- Key speakers discussed the different asset classes, including real estate, corporate, and consumer debt.
Investors have been urged to capitalise on investing in distressed assets and non-performing loans to grow their portfolios. According to experts at the Annual Investment Meeting (AIM), non-performing loan (NPL) investing is becoming a popular strategy for investors seeking high returns.
The conference, which was held in two panels examined the current global economic environment and how rising interest rates are creating opportunities for distressed debt investors.
According to Harvard Business School, distressed debt investing is the process of investing capital in the existing debt of a financially distressed company, government, or public entity.
Why having partners is a must
The speakers discussed the different asset classes in this sector of the market. Some of the asset classes under focus were real estate, corporate, and consumer debt.
Also discussed were challenges that could limit the growth of this market, including the absence of covenants in credit documents. Additionally, the amount of dry powder in the market, and the maturity wall not ramping up until 2025 was highlighted.
“Financial distress is the most common. If there is opportunity, then there is a debt sitting around, but there are legal services to get ourselves out of it. Having partners is a must because if someone goes on strike in the middle of your forecast, then it’s troublesome.
Find the best opportunity
“Key role is to follow the market and the supply and stay open to find the best opportunity. There are plenty of opportunities out there and we must be wise to choose, and it’s a bit exciting,” LynxCap Investments Managing Director Konstantin Kraiss said.
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He added that entering new markets is all about learning and gaining experience. For instance, he noted that it took his firm six years before making the first investment because it’s not easy.
His sentiments were shared by APS Group CEO Martin Machon, who added that with the current inflation and work crisis, the market risks are higher.
When starting, go for smaller distressed assets
“We must be careful and aware of the legal framework and have a good partner. When starting out, it’s better to go for smaller assets. The banking system has evolved, but we still face challenges in dealing with limited tools from them. We need to investigate the services beforehand and strengthen them through knowledge sharing,” Martin stated.
According to Oasis Global Consulting, USA CEO and Co-Founder Inam ur Rahman NPL, markets were thriving before Covid, but it is difficult to predict how it will be impacted in the future.
“The legal framework for NPL varies across countries, and some countries have developed strict NPL laws, which could be beneficial for investors. Technology has also had a positive impact on the industry, and I am optimistic about the future,” he stated.
Rahman said that investing in NPL is challenging, and it requires a proper team to navigate the legal landscape adding that lack of clarity and understanding could lead to losses.
“Technology, such as blockchain, can help minimize the risk of fraud. To succeed in this industry, it is crucial to have a team of experts who can evaluate and assess the situation,” he said.
During the conference, experts emphasized that investors need to have a solid understanding of the different NPL investment strategies available in order to make informed investment decisions.
The risks in distressed assets
For example, some investors may prefer to focus on purchasing individual NPLs, while others may prefer to invest in portfolios of NPLs.
Additionally, investors need to be aware of the unique risks associated with investing in distressed assets, such as potential legal and regulatory hurdles, liquidity risks, and market volatility.
The experts also highlighted how real estate investments can be an attractive option for investors seeking diversification and long-term returns.
They highlighted how, like any investment, real estate carries risks and uncertainties, which can lead to distressed assets. A distressed asset is a property that is under financial or operational distress, often due to foreclosure or bankruptcy.
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“Lack of transparency brings an opportunity to people with a lack of experience in data. In hotels with distress angels, we can get 18-20 percent. Distressed is never advertised. In Europe, bankruptcy is very efficient and gets dragged to 5-8 years. The value is high. We always focus on consensual deals. With a discount of 50 percent on average, it gives us confidence to achieve three-quarters of our goals. We very often negotiate with existing loans or lenders. We don’t buy your loan and become a creditor, it’s risky,” Federico Gaito, Managing Director, Taurus Asset Management said.
Unique regulatory and legal frameworks
Panelists shared their experiences and analysis of investing in distressed and NPL assets across different geographies, including emerging markets and developed economies.
They also discussed the challenges and opportunities of investing in these markets, taking into account macroeconomic conditions. Also to be considered are industry-specific trends and the unique regulatory and legal frameworks that govern these transactions.
“No simple way of escaping inflation because it has caused harm to high earners as well as low earners. In Europe, there is no rounding price market. There is a difference when it comes to foreign businesses, it’s better if you are local and invest locally. We will see better fare in the local market. Keep in mind the location and regional funds,” Investment Director APS Investments Mihai Pop said.
