Office No. 106A, B-Wing Kanakia Wall Street,
Andheri - Kurla Rd, Chakala, Andheri East,
Mumbai, Maharashtra - 400093
Expected IRR(p.a.): More than 15%
Suggested Horizon: More than 6 Years
Minimum Investment as per SEBI: ₹ 1,00,00,000
Distressed Asset Funds are investment vehicles that focus
on purchasing assets from
companies in financial distress,
such as debt, equity, or real estate. These assets are
often
undervalued due to the company’s challenging
circumstances, providing an
opportunity for investors to
buy at a discount and potentially benefit from a future
recovery.
Investing in Distressed Asset Funds can offer substantial
rewards as these assets have the
potential for high returns if
the distressed companies recover or if the assets are
successfully restructured. This investment approach
requires a deep understanding of risk
management and
market dynamics, offering a unique angle for portfolio
diversification.
“It’s far better to buy a wonderful company at a fair price
than a fair company at a
wonderful price”
~ Warren Buffet
Source: Allianz Research, Mint
The current U.S. banking crisis, global economic downturn, and tight monetary conditions are impacting the worldwide banking system. This situation often reduces credit growth and leads to increased insolvency filings, a trend observed in major Asian economies, especially India and Japan. In India, insolvency filings surged by 50% in 2022. Managing these insolvencies through the sale of distressed assets can mitigate risks for depositors and offer a revival path for struggling businesses. This crisis presents an opportunity for investors to acquire assets at significantly lower prices, with potential for capital creation in the system and about 2% of total credit allocation turning bad, offering a ripe market for distressed asset investors.
Distressed asset funds are category II Alternative Investment Funds (AIFs) that invest in stressed assets of diverse organizations, with the investment theory that not all non-performing assets (NPAs) are terrible assets and that turning them around would yield a positive return. The key to the success of a distressed asset fund lies in buying good underlying assets at reasonable valuations, which have the potential for a turnaround.
If the value of an asset falls or decreases not because of the market conditions but due to issuer fault, it is called a distressed asset. For example, if a company is not able to repay the principal and interest amount of a loan it has taken, it becomes a distressed asset.
Distressed asset values are far below the market rate, with a discount ranging from 20% to 80 %. It is a risky investment, but if invested properly gives extremely high returns. When it comes to repayment, the investor in distressed assets has preference even before shareholders and employees.
In addition, if creditors are successful in turning around the company's finances, they may be able to acquire ownership of the business and earn even more.
India has seen a rise in Distressed Asset Investment in the last few years, mainly because now, the investors feel more secured in putting their money in distressed assets after IBC (Insolvency and Bankruptcy Code, 2016) and other laws have regulated this kind of financing.
Moreover, Distressed assets investment gives them a wonderful opportunity to gain high profit at a low cost, if they can identify the correct investee companies, the primary motivation for investing in distressed assets is this. To take advantage of a distressed asset and make money out of, a lot of planning and knowledge of the business is required. Without a proper plan, distressed asset investments are highly risky.
Big institutional investors like banks, large pension funds, and insurers—including international companies—typically contribute to distressed asset funds. SEBI regulations states that the minimum ticket size for distressed asset funds is Rs.1 crore and the maximum number of investors cannot be more than 1,000.
When it comes to taxation, Category II AIFs have a pass-through status. This means that any income (except for business income) that the fund generates, is taxed to the investor and not to the fund house - even if the investor has not redeemed the investment. The investors need to pay taxes according to their respective tax slabs.
Therefore, if you invest in category II AIF, you need to pay capital gain tax on the profit or loss you make from the AIF funds within a given duration. The duration here is important to understand whether long-term capital gain tax or short-term capital gain tax would be applied. As per the recent rules for LTCG, 20% is the rate of tax with indexation benefit. If the profits are taxed as STCG, then the rate would be 15%. There is a surcharge, and cess charges on and above the mentioned tax rates as well. Any income (except business income) distributed by the investment fund is not liable for DDT and TDS of 10% will be deducted by the investment fund.
Office No. 106A, B-Wing Kanakia Wall Street,
Andheri - Kurla Rd, Chakala, Andheri East,
Mumbai, Maharashtra - 400093
