Special situations funds shine

SSFs from US, Europe and Far East are pursuing Indian companies.

After private equity funds, hedge funds and foreign institutional investors (FIIs), it is the turn of multi-billion dollar special situations funds (SSFs) to make hay while the Indian economy shines.

Quite a few SSFs from the US, Europe and the Far East are currently pursuing investment opportunities in distressed manufacturing companies in India for potential high returns over a longer term.

The combined corpus can run into billions of dollars. These funds consider corporate turnaround, restructuring, bankruptcies and divestitures as special situations offering openings for acquiring under-valued assets.

SSFs are like private equity funds but in the nature of adventurous risk funds. These funds seek under-valued companies possessing above average potential for capital growth and also play active role in the management of the companies they invest in.

Fund managers like Fidelity and Morgan Stanley are among the big names managing special situations funds. The lesser-known names include Avenue Asia Special Situations Fund, Value Line Special Situations, Artemis UK Special Situations Fund, Legg Mason Special Situations Fund and Western Pacific Special Situations Fund.

Distressed assets often provide SSFs a bigger scope to deploy larger amounts as capital is required to settle existing debt and also for funding growth.

SSFs typically acquire up to 50 per cent equity in companies where promoters also commit themselves and buy out distressed assets in cases where promoters decide to exit.

Some of the companies which are being recast through the corporate debt restructuring (CDR) mechanism can be targeted by SSFs. They can also buy assets from the asset reconstruction funds, sources say.

The private equity market has become very competitive in India with a lot of funds chasing very few assets. This has resulted in funds deciding to expand their horizons and seek distressed assets, which are undervalued but have above average growth potential.

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UPLIFT

SSFs seek under-valued firms having above average potential for capital growth

These funds consider corporate turnaround, restructuring, bankruptcies and divestitures as special situations

Distressed assets often provide SSFs a bigger scope to deploy larger amounts

SSFs typically acquire up to 50 per cent equity in companies where promoters also commit themselves