Distressed assets investment landscape in India has come of age where the time is ripe for investors to step in and pick up ‘value’ assets to earn maximum potential out of them.
What are distressed assets?
It is an asset which is usually put on sale at a cheap price because its owner is forced to sell it. There could be multiple reasons for the sale of such asset class, such as bankruptcy, excessive debt and other regulatory constraints. Debt itself can be sold to an interested buyer at below face value. It is called distressed debt.
Trends in India
Earlier India had a fair share of stressed assets but investors were cautious from this space due to the absence of a robust legal, regulatory and resolution frameworks. With the introduction of Insolvency and Bankruptcy Code (IBC), this scenario has changed as it has provided the investors a strong legal structure, well-defined process, responsibilities and a definite timeline.
Why distressed assets are attractive?
- Distressed assets are exciting for the investors because of their inherent ‘buy low-sell high’ potential and low correlation to other asset classes.
- But, there is a catch. Unlike a blue-chip equity investment, distressed asset investments need considerable handholding after the initial financial assistance.
Lessons for distressed investors
Risk and Reward
Mortality rate of distressed asset investments are similar to convertible debt, with better downsides than equity as the taken over business has a fair past record and a cleaned-up balance sheet. However, the valuation as well as liquidity issues and price discovery can be a challenge for the investors.
Low correlation with traditional asset classes
These type of investments are usually stand-alone financial engineering opportunities with little or very low correlation with equity or debt markets. Therefore, they offer a great diversification strategy for investors.
Adjudication procedures in India are very complex and time consuming. While the IBC is expected to introduce a change, it remains to be tested even now. Sudden changes in government policies can also adversely affect the distressed investments. It is time to follow the precedents and define case laws to bring greater clarity.
Partnering with experts
It is important to partner with industry professionals, private equity funds or special situation experts in order to turn around distressed companies. These experts can also help to identify the potential ‘value’ assets even before they are classified officially as ‘distressed’, so as to mitigate legal uncertainties.
It is not easy to run a company without the support of the promoter as several issues such as regulatory concerns, labour unions, and legal matters become tedious without him/her. Therefore, alienating a promoter may not yield the good return for the investors in India.
Robust incentive framework
A robust and fair incentive structure must be set up for each stakeholder to turnaround the loss story. Non-alignment of interests of stakeholders can derail restructuring activities and squander the invested capital.
It is important to fully milk the opportunity posed by the distressed investments but caveats do apply such as taking care of the risks attached with legal, operational and valuation issues.
Source – Livemint
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