US hedge funds and private equity firms that specialise in distressed situations are gearing up new or existing European offices in expectation of a surge in coming opportunities as the continent grapples with its sovereign debt crisis and sputtering growth.
Two of the biggest names in the field Centerbridge Partners and Baupost, which is headed by industry legend Seth Klarman, have opened offices in London in recent months, while others have launched Europe-dedicated funds or bolstered staff numbers by poaching from the distressed debt desks of banks.
“It’s hard to ignore the sheer size of the problems in Europe, and that has caused a lot of firms to come over,” said Mubashir Mukadam, European head of special situations at KKR Asset Management.
European banks still hold hundreds of billions of euros worth of assets that could be sold at depressed prices, and large parts of the financial system are severely dislocated, opening up opportunities for funds that specialise in mispriced assets such as loans and bonds.
“Unlike their US counterparts who acted quickly to sell down their troubled loan portfolios after the onset of the financial crisis, UK and European based banks have only recently begun to reduce their exposures,” Jeffrey Aronson, founding co-partner of Centerbridge wrote in a letter to investors dated June 23.
Bruce Karsh, the co-founder of Oaktree Capital, one of the world’s largest distressed investors, has also been telling investors that Europe will be one of the firm’s principal areas of focus. Other US distressed debt funds increasingly focused on Europe include Apollo Global Management, Marathon Asset Management and Carlyle Strategic Partners.
Indebted companies that eventually default could prove another rich seam of work for investors that focus on taking over companies in debt-for-equity swaps or insolvencies.
Europe has been in the sights of distressed debt investors for some time – Ireland in particular – but the recent turmoil and resurgent fears of a double-dip recession has added further momentum to their plans.
“Given the huge market dislocation in Europe the distressed opportunities are coming from all angles,” said Anthony Robertson, head of high yield and distressed investing at BlueBay, a London-based asset manager.
Still, some European industry insiders warn that the opportunities may be more difficult to exploit than hoped for by many funds, given the continent’s fragmented market and cultural, political and legal idiosyncrasies.