Last word: SSG Capital Management

What motivated you to launch your first secured lending fund?

Historically, we have focused entirely on special situations investing, which consisted of a good percentage of stressed or distressed situations. However, we have realised over the years that a lot of our clients migrate to bank financing, issuing bonds or distributing equity once their issues are solved. They no longer fit into the special situation category and rather than losing them, we would like to build on the relationship.

That’s why we created a secured lending fund that is able to capture lending opportunities with companies that are healthy. In view of the existing trust and our value-add approach, these clients see the benefit of our financing, despite the mid-teen return that we are targeting.

What is the outlook for distressed debt in Asia in 2016? 

It’s going to be very interesting. We tend to see more opportunities when the public market is down or when the economies are not as hot. Leverage has also increased in most Asian economies since the global financial crisis. What we see now is that more companies are under stress, so their needs for financing solutions or creative capital are very real. 

We are also seeing financial institutions coming out and offering portfolios to us, which doesn’t happen very often. Banks are looking to find homes for their troubled assets. That’s another good source for us that we have not seen for a while.

Which strategy is offering the most opportunity at the moment, special situations lending or secured lending?

I think both strategies present very interesting opportunities in Asia as the banking and capital markets for many of the countries here are still relatively undeveloped and inefficient. In comparison to the US and Europe, the private lending market here is less crowded. Asia consists of many different economies and it requires significant depth and breadth to cover the region well. It’s hard enough to get China or India right and what you learn in one market may not be that relevant to another. Hence significant effort is required to build on-the-ground resources in multiple geographies coupled with a regional platform. 

The special situations strategy is always going to be more niche, so in terms of the size of the opportunity set, the opportunity for secured lending is bigger. There are always more companies that are sound and growing than those that are stressed or distressed. Both strategies will grow but secured lending is more scalable in the long run.

Which sectors are investors most interested in?

We are sector agnostic. There are a number of sectors that we have developed deep vertical knowledge in, which gives us an edge. Often whether a deal is attractive or not has to do with entry valuation. A lower entry valuation not only creates more upside but more importantly mitigates risk. We are deep value investors, which are less likely to chase after hot themes or sectors.

How do you source your deals?

We rely a lot on our local network. The team spends a lot of time on the ground, talking to the local business community, from business owners to local intermediaries.

Some Chinese real estate developers have defaulted on debt, how does SSG deal with the market concerns about Asia and China specifically?

There is no doubt that China is slowing. But that could actually translate into more opportunities for investors like us. While a lot of work we do is focused on the specific underlying business, we do factor in the macro headwinds that may affect the investment. We analyse not only the economic factors, but also any political changes that might impact the overall return of a deal. 

It’s interesting that you point out real estate in China. When the property market was booming, we were actually rather uncomfortable with the high valuations. Now the market has begun to settle down, we are keener to look at the sector as the owners’ expectations have turned more realistic.