Annual Investment Meeting Brings To Focus The Opportunities And Challenges Of Investing In Distressed Assets And Non-Performing Loans (NPLs)

Investment experts from around the world discussed the opportunities and challenges of investing in distressed assets and non-performing loans (NPLs) at the 12th edition of the Annual Investment Meeting (AIM), which took place at the Future Room located at the Abu Dhabi National Exhibition Centre.

The conference was held in two panels. The first panel ‘The Role of Distressed Real Estate in a Diversified Portfolio’ examined the current economic environment and how rising interest rates are creating opportunities for distressed debt investors. The speakers discussed the challenges that could limit the growth of this market, including the absence of covenants in credit documents, the amount of dry powder in the market, and the maturity wall not ramping up until 2025.

This session was led by Viktoria Soltesz, CEO, PSP Angels. Featuring experts as Mihai Pop, Investment Director APS Investments, Hans-Jörg Baumann, Chairman of StepStone Private Debt, CH, Federico Gaito, Managing Director, Taurus Asset Management, ES, Christophe Beauvilain, Managing Partner, Pygmalion Capital Advisers, UK, the session highlighted how real estate investments can be an attractive option for investors seeking diversification and long-term returns. They also 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.

Christophe Beauvilain said, “The majority of the reason in financial difficulty is because it's easy to fall in love with the project. It's a warning, don't do that. In hotel assets, the bank will seize your assets if things get bad, but even then, that's not very likely to happen. When things get bad, we sell. Our role is to go and negotiate with sellers and help the buyers buy assets. Before Covid, we were at peak, and then we saw a sudden crash. The loan and salary inflation are bad, so there aren't many investors. The next massive issue is the financing rate. We are focusing on Italian hotels and are looking forward to it as they provide quality. The Italian market is keener with their buyers."

Mihai Pop said, “No simple way of escaping inflation because it has caused harm to high earners as well as low earners in the market. 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 fair in the local market. Keep in mind the location and regional funds.”

Federico Gaito said, “"Working with local experts from a data and theoretical point of view can avoid and price it very differently. Lack of transparency brings an opportunity to people with a lack of experience in data. In hotel with distress angels, we can get 18-20%. 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% 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."

Hans-Jörg Baumann said, “Performance is the sum out of potential. When it comes to assets, we need to deny the disturbances that are many. It's tangible. If financing doesn't work, then it's a tremendous problem for real estate. Do you need to generate income? How much flow is real estate going to generate? It could be refinancing costs, there is market stress. Do you have the legislative power to stay in this business? Acquiring a legal system is a must when it comes to endorsing your rights. The Anglo-Saxon world has an advantage over the foreign market. The only choice is obtaining luxury information about the legal system and assets. Entering a transaction is easy, exiting is hard. If low on income, offense with capital. Don't go for bulk risk.

The second panel, ‘Global NPL Investing: Strategies & Opportunities’ explored the world of global distressed and NPL investing, with insights into the strategies and opportunities available in this space. The speakers discussed the different asset classes in this sector of the market, including real estate, corporate, and consumer debt, the secondary market, and the directions the market is heading in due to macroeconomic forces.

The session was led by Edwin Harrap, Director, Alantra, UK, and included panellists as José Nestola, Founder & CEO, Copernicus Group, ES, Konstantin Kraiss, Managing Director, LynxCap Investments, CH, Martin Machon, CEO, APS Group, CZ and Inam ur Rahman CEO & Co-Founder, Oasis Global Consulting, USA.

According to experts in this session, non-performing loan (NPL) investing has become an increasingly popular strategy for investors seeking high returns. Panellists 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, industry-specific trends and the unique regulatory and legal frameworks that govern these transactions.

José Nestola said, “We are spread over six countries, and the real challenge is the quality of data. Not everything is clear when it is given to us by people. In two to three years, we shall be talking about millions moving into the bank. But how? Such information is difficult to get your hands into. Especially in the corporate world. We focus on second opportunities. Lack of information will stop you from pricing better. Real estate, legal, and financial knowledge is a must. When done right, equity returns (13-15%). Here your return will be achieved. When we price everything at the end of the day, we try to see what the potential buyers want and who they are. The banks are for selling to the right investors and managing the reputation of themselves. Who is going to check the services in the market, and what treatment will they have? It's a tough scheme. Buying a portfolio of loans is difficult for banks and debtors."

Konstantin Kraiss said, "Entering new markets is all about learning and gaining experience. It took us 6 years before making the first investment because it's not easy. Financial distress is the most occurred. 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. 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."

Martin Machon said, "Entering the industry is not easy, it takes time and effort, especially in new markets and first transactions. With the current inflation and work crisis, the risks are higher. 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."

Inamur Rahman said "I believe that 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. However, investing in NPL is challenging, and it requires a proper team to navigate the legal landscape. 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."

Experts emphasised that investors need to have a solid understanding of the different NPL investment strategies available in order to make informed investment decisions. 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.

Overall, global NPL investing presents a promising opportunity for investors looking to diversify their portfolios and capitalize on distressed assets in the market.