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Opportunities for Distressed Funds in South Africa
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  • 1. Opportunities forDistressed Funds inSouth AfricaApril 2013Eric Levenstein & Shayne KrigeFollow this event on Twitter: #WerksmansDistressedFunds
  • 2. 2Business RescuePractice GroupInvestment FundsPractice GroupEric Levenstein Shayne Krige
  • 3. Why are we heretoday?3
  • 4. Presentation Overview Defining Distressed Private Equity Overview of Distressed Private Equity Strategies Distressed Private Equity in other Markets The South African Business Rescue Regime Using the Business Rescue Regime to ImplementDistressed Strategies in South Africa4
  • 5. Presentation Overview Defining Distressed Private Equity Overview of Distressed Private Equity Strategies Distressed Private Equity in other Markets The South African Business Rescue Regime Using the Business Rescue Regime to ImplementDistressed Strategies in South Africa5
  • 6. 6Defining Distressed AssetsA distressed asset is any asset that isundervalued.
  • 7. 7Defining Distressed Assets‣ Shares, bonds or debt instruments issued bycompanies that are either already in default,under bankruptcy protection or heading towardssuch a condition.‣ In the US, fixed income debt is considereddistressed when:‣ yield to maturity > 1,000 basis points abovethe risk-free rate of return; or‣ rated CCC or worse.
  • 8. 8Defining Distressed Private EquityDistressed private equity investors believe that anasset is not as bad as the market believes it to beand either the company will survive or there will beenough money upon liquidation to cover theoriginal investment.
  • 9. 9Defining Distressed Private EquityHigh Risk so not suitable forretail investors.
  • 10. Presentation Overview Defining Distressed Private Equity Overview of Distressed Private Equity Strategies Distressed Private Equity in other Markets The South African Business Rescue Regime Using the Business Rescue Regime to ImplementDistressed Strategies in South Africa10
  • 11. Presentation Overview Defining Distressed Private Equity Overview of Distressed Private Equity Strategies Distressed Private Equity in other Markets The South African Business Rescue Regime Using the Business Rescue Regime to ImplementDistressed Strategies in South Africa11
  • 12. 12Distressed Private Equity StrategiesDPE StrategiesNon-Control ControlSingle Credits PoolsPassiveTradingActiveTradingRestructure Turnaround
  • 13. Distressed Private Equity StrategiesSingle CreditsSingle CreditsSingle CreditsSingle Credits Pools/NPLNon-Control/Special SituationsNon-Control/Special Situations Control/TurnaroundControl/Turnaround Distressed DebtPassive Trading Active Trading Restructuring TurnaroundSummaryInvest in companiesthat will rebound ontheir own.Take a non-controlling interest,influence theprocess.Obtain controllinginterest,restructure.Obtain controllinginterest, improveoperations.Purchase packagesof assets frombanks, settle.Instruments Debt/Equity Debt/Equity Equity/Debt Equity/Debt DebtSkills Required Trading, creditTrading, credit,restructuringTrading, credit,restructuring, legalTrading, credit,restructuring, legal,operationalLegalTimeframeDays or weeks>2 years1-2 years 2-5 years 2-5 years or longer To maturityReturns 12-18% 15-20% 18-25% 20-25% 25% / 1.75x13
  • 14. Single CreditsSingle Credits Pools/NPLNon-Control/Special SituationsNon-Control/Special Situations Control/TurnaroundControl/Turnaround Distressed DebtPassive Trading Active Trading Restructuring TurnaroundSummaryInvest in companiesthat will rebound ontheir own.Take a non-controlling interest,influence theprocess.Obtain controllinginterest,restructure.Obtain controllinginterest, improveoperations.Purchase packagesof assets frombanks, settle.Instruments Debt/Equity Debt/Equity Equity/Debt Equity/Debt DebtSkills Required Trading, creditTrading, credit,restructuringTrading, credit,restructuring, legalTrading, credit,restructuring, legal,operationalLegalTimeframeDays or weeks>2 years1-2 years 2-5 years 2-5 years or longer To maturityReturns 12-18% 15-20% 18-25% 20-25% 25% / 1.75xDistressed Private Equity Strategies14Alternative Funds
  • 15. Single CreditsSingle Credits Pools/NPLNon-Control/Special SituationsNon-Control/Special Situations Control/TurnaroundControl/Turnaround Distressed DebtPassive Trading Active Trading Restructuring TurnaroundSummaryInvest in companiesthat will rebound ontheir own.Take a non-controlling interest,influence theprocess.Obtain controllinginterest,restructure.Obtain controllinginterest, improveoperations.Purchase packagesof assets frombanks, settle.Instruments Debt/Equity Debt/Equity Equity/Debt Equity/Debt DebtSkills Required Trading, creditTrading, credit,restructuringTrading, credit,restructuring, legalTrading, credit,restructuring, legal,operationalLegalTimeframeDays or weeks>2 years1-2 years 2-5 years 2-5 years or longer To maturityReturns 12-18% 15-20% 18-25% 20-25% 25% / 1.75xDistressed Private Equity Strategies15Alternative/Private Equity Funds
  • 16. Single CreditsSingle Credits Pools/NPLNon-Control/Special SituationsNon-Control/Special Situations Control/TurnaroundControl/Turnaround Distressed DebtPassive Trading Active Trading Restructuring TurnaroundSummaryInvest in companiesthat will rebound ontheir own.Take a non-controlling interest,influence theprocess.Obtain controllinginterest,restructure.Obtain controllinginterest, improveoperations.Purchase packagesof assets frombanks, settle.Instruments Debt/Equity Debt/Equity Equity/Debt Equity/Debt DebtSkills Required Trading, creditTrading, credit,restructuringTrading, credit,restructuring, legalTrading, credit,restructuring, legal,operationalLegalTimeframeDays or weeks>2 years1-2 years 2-5 years 2-5 years or longer To maturityReturns 12-18% 15-20% 18-25% 20-25% 25% / 1.75xDistressed Private Equity Strategies16Private Equity Funds
  • 17. Single CreditsSingle Credits Pools/NPLNon-Control/Special SituationsNon-Control/Special Situations Control/TurnaroundControl/Turnaround Distressed DebtPassive Trading Active Trading Restructuring TurnaroundSummaryInvest in companiesthat will rebound ontheir own.Take a non-controlling interest,influence theprocess.Obtain controllinginterest,restructure.Obtain controllinginterest, improveoperations.Purchase packagesof assets frombanks, settle.Instruments Debt/Equity Debt/Equity Equity/Debt Equity/Debt DebtSkills Required Trading, creditTrading, credit,restructuringTrading, credit,restructuring, legalTrading, credit,restructuring, legal,operationalLegalTimeframeDays or weeks>2 years1-2 years 2-5 years 2-5 years or longer To maturityReturns 12-18% 15-20% 18-25% 20-25% 25% / 1.75xDistressed Private Equity Strategies17Private Equity Funds
  • 18. Single CreditsSingle Credits Pools/NPLNon-Control/Special SituationsNon-Control/Special Situations Control/TurnaroundControl/Turnaround Distressed DebtPassive Trading Active Trading Restructuring TurnaroundSummaryInvest in companiesthat will rebound ontheir own.Take a non-controlling interest,influence theprocess.Obtain controllinginterest,restructure.Obtain controllinginterest, improveoperations.Purchase packagesof assets frombanks, settle.Instruments Debt/Equity Debt/Equity Equity/Debt Equity/Debt DebtSkills Required Trading, creditTrading, credit,restructuringTrading, credit,restructuring, legalTrading, credit,restructuring, legal,operationalLegalTimeframeDays or weeks>2 years1-2 years 2-5 years 2-5 years or longer To maturityReturns 12-18% 15-20% 18-25% 20-25% 25% / 1.75x18Prerequisites for DPE StrategiesAccess to banksLaw of Contract
  • 19. Single CreditsSingle Credits Pools/NPLNon-Control/Special SituationsNon-Control/Special Situations Control/TurnaroundControl/Turnaround Distressed DebtPassive Trading Active Trading Restructuring TurnaroundSummaryInvest in companiesthat will rebound ontheir own.Take a non-controlling interest,influence theprocess.Obtain controllinginterest,restructure.Obtain controllinginterest, improveoperations.Purchase packagesof assets frombanks, settle.Instruments Debt/Equity Debt/Equity Equity/Debt Equity/Debt DebtSkills Required Trading, creditTrading, credit,restructuringTrading, credit,restructuring, legalTrading, credit,restructuring, legal,operationalLegalTimeframeDays or weeks>2 years1-2 years 2-5 years 2-5 years or longer To maturityReturns 12-18% 15-20% 18-25% 20-25% 25% / 1.75x19Prerequisites for DPE StrategiesAccess to financial informationMarketShareholder activism (Companies law)
  • 20. Single CreditsSingle Credits Pools/NPLNon-Control/Special SituationsNon-Control/Special Situations Control/TurnaroundControl/Turnaround Distressed DebtPassive Trading Active Trading Restructuring TurnaroundSummaryInvest in companiesthat will rebound ontheir own.Take a non-controlling interest,influence theprocess.Obtain controllinginterest,restructure.Obtain controllinginterest, improveoperations.Purchase packagesof assets frombanks, settle.Instruments Debt/Equity Debt/Equity Equity/Debt Equity/Debt DebtSkills Required Trading, creditTrading, credit,restructuringTrading, credit,restructuring, legalTrading, credit,restructuring, legal,operationalLegalTimeframeDays or weeks>2 years1-2 years 2-5 years 2-5 years or longer To maturityReturns 12-18% 15-20% 18-25% 20-25% 25% / 1.75x20Prerequisites for DPE StrategiesBankruptcy LawAccess to financial informationCompanies Law
  • 21. 21Legal Prerequisites for Control Strategy The law must stress re-organising acompany so it can continue to operateinstead of focusing on liquidating acompany (US 1978 Chapter 11 ofBankruptcy Code). Necessitates a deep knowledge &experience in bankruptcy law. Supply of transactions.
  • 22. Presentation Overview Defining Distressed Private Equity Overview of Distressed Private Equity Strategies Distressed Private Equity in other Markets The South African Business Rescue Regime Using the Business Rescue Regime to ImplementDistressed Strategies in South Africa22
  • 23. Presentation Overview Defining Distressed Private Equity Overview of Distressed Private Equity Strategies Distressed Private Equity in other MarketsStructuring PointsUS & EuropeEmerging Markets The South African Business Rescue Regime Using the Business Rescue Regime to ImplementDistressed Strategies in South Africa23
  • 24. Corporate Fund Structure24ManagementAgreementManagementAgreementOfferingMemorandumInvestorsMSharesPSharesDistressedAssetsAdministratorBankRegisteredAgentCustodianAdvisorAdvisoryAgreementCustodianAgreementBankingAgreementsRegistered AgentAgreementAdministrationAgreementOnshoreManagerOffshoreManagerFundCompany
  • 25. Limited Partnership Fund Structure25ManagementAgreementInvestorsDistressedAssetsAdministratorBankCustodianOnshoreAdvisorAdvisoryAgreementCustodianAgreementBankingAgreementsAdministrationAgreementOnshoreManagerOffshoreGeneralPartnerLimitedPartnershipLimited Partnership AgreementOffering MemorandumUnlimited Liability Limited Liability
  • 26. Presentation Overview Defining Distressed Private Equity Overview of Distressed Private Equity Strategies Distressed Private Equity in other MarketsStructuring PointsUS & EuropeEmerging Markets The South African Business Rescue Regime Using the Business Rescue Regime to ImplementDistressed Strategies in South Africa26
  • 27. Location of Private Equity Firms Considering DPE27Preqin, Funds in Market Report54%46%USEurope
  • 28. Distressed Private Equity in the US and Europe28Investor appetite for distressedprivate equity investments isincreasing.Preqin, Funds in Market Report
  • 29. Distressed Private Equity in the US and Europe29Distressed private equity raised$92bn in 2007/2008 in USPreqin, Funds in Market Report
  • 30. Distressed Private Equity in the US and Europe30Preqin, Funds in Market Report2011 2012Number of DPE Funds 64 68Total Commitments Sought $47.8bn $49.2bn
  • 31. 2011 2012Number of DPE Funds 64 68Total Commitments Sought $47.8bn $49.2bnDistressed Private Equity in the US and Europe31Preqin, Funds in Market ReportRecord Year
  • 32. Distressed Private Equity in the US and Europe32Average fund target size is:$724m (US)€478m (EU)Preqin, Funds in Market Report
  • 33. Distressed Private Equity in the US and Europe33Preqin, Funds in Market ReportName Target SizeGSO Capital Solutions F $5bnCerberus Institutional Partners V $3.75bnEuropean Principal Finance Fund II €2.5bn
  • 34. Distressed Private Equity in the US and Europe34TPG Opportunities Partners II (Texas Pacific Group)raised $2.1bn in December 2012 ($600m overtarget). Fund focusses on control, non-control andNPL strategies.Preqin, Funds in Market Report
  • 35. Distressed Private Equity in the US and Europe35KKR (Kohlberg Kravis Roberts) has raised$60bn in 10 years.Preqin, Funds in Market ReportOaktree has raised$53bn in 10 years.
  • 36. Distressed Private Equity in the US and Europe3628% of new fundsbeing raised by first timemanagers.Preqin, Funds in Market Report
  • 37. Distressed Private Equity in the US and Europe37Preqin, Funds in Market ReportDistressed Debt43% Special Situations37%Turnaround Funds20%Distressed DebtSpecial SituationsTurnaround Funds
  • 38. Distressed Private Equity in the US and Europe38As at December2012,Turnaround Strategyis the most popularwith investors.Preqin, Funds in Market Report
  • 39. 39Why is Europe Lagging the US? Each country has its own bankruptcy laws making cross-EUbankruptcies difficult to navigate. Restrictive employment laws (Marks & Spencer) Lower supply of transactions because:banks not enforcing because less pressured into writing offloans or selling at discount and PR nightmare;Insolvency rates are actually at a 30-year low in Europe.
  • 40. Presentation Overview Defining Distressed Private Equity Overview of Distressed Private Equity Strategies Distressed Private Equity in other MarketsStructuring PointsUS & EuropeEmerging Markets The South African Business Rescue Regime Using the Business Rescue Regime to ImplementDistressed Strategies in South Africa40
  • 41. Challenges for DPE in Emerging Markets Emerging markets ignored bylarge houses. Lack of knowledge of bankruptcyand commercial law. Untested new legislation. Short supply of transactions.41
  • 42. Non-Control Strategies in Emerging Markets Form the bulk of DPE strategies in emerging markets. Focus on large entities with currency losses. Opportunities now arising from:tighter local credit market; andchallenging market conditions.42
  • 43. Control Strategies in Emerging Markets Few deals have been executed. Difficult to execute.Family control model.Restrictive employment models. Low investor comfort with bankruptcy laws and creditrights. Opportunities arise.43
  • 44. NPL Strategies in Emerging Markets44Most countriesoutside Asia lackactive NPL market.
  • 45. Asia DPE market created by 1990’s Asian crisis. Currency devaluations and capital flight. Governments required loan write-downs.45
  • 46. Asia $7.5bn raised for DPE during Asian crisis by:Lone StarThe Carlyle GroupNewbridgeWarburg PincusJ.P. Morgan PartnersLarger hedge funds doing PE-style deals46
  • 47. Asia - China China - Mostly NPL but now single credit non-controlopportunities. Additional supply from struggling foreign institutionsunloading their Asian holdings. However, systemic regulatory issues made for thinnertrading volume. Investor recourse in bankruptcy remains unclear.47
  • 48. Emerging Europe One of the most distressed regions across the globe. Rapid escalation in foreign currency-denominatedborrowing. Only a handful of firms are active in the region,including: Avenue Capital Group and CRG Capital; Little consumer debt so focus is less on NPLs and moreon turnaround strategies. Countries with bankruptcy laws that support freeenterprise the focus:Ukraine, Hungary, Turkey, Czech Republic;Not Russia, Bulgaria, Romania.48
  • 49. Africa Investors worried that:Lack of developed business rescue regimes;Lack of legal certainty including from corruption BUT, this coupled with entry barriers createsopportunities for local managers that understand thelandscape. Little consumer debt and outside South Africa smallmarket for NPLs so focus on turnaround strategies.49
  • 50. South Africa Best-placed in Africa for implementation of all DPEstrategies:Relatively developed NPL market;Active markets for non-control strategies;Skilled traders;Skilled corporate and legal personnel for turnarounds;New business rescue regime.50
  • 51. THANK YOUShayne KrigeApril 2013Nothing in this presentation should be construed as formallegal advice from any lawyer or this firm. Readers are advisedto consult professional legal advisors for guidanceon legislation which may affect their businesses.© 2011 Werksmans Incorporated trading as WerksmansAttorneys. All rights reserved.
  • 52. South Africa - Business Rescue Regime52Single CreditsSingle CreditsSingle CreditsSingle Credits Pools/NPLNon-Control/Special SituationsNon-Control/Special Situations Control/TurnaroundControl/Turnaround Distressed DebtPassive Trading Active Trading Restructuring TurnaroundImpact of BusinessRescueExpect increasednumber ofcompanies thatrebound.Companies Actfacilitatesshareholderactivism.Buys time torestructure.Buys time toimprove operations.No change.Post-commencementfinancing.Post-commencementfinancing.Post-commencementfinancing.Post-commencementfinancing.Ability to influenceprocess throughpractitioner.Ability to influenceprocess throughpractitioner.Entry PointPredominantlyEquity Markets,some debtDebt and EquityMarketsCIPC businessrescue noticesBus rescuepractitionersCIPC businessrescue noticesBus rescuepractitionersConnections atbanksSkills Required Trading, creditTrading, credit,restructuringTrading, credit,restructuring, legalTrading, credit,restructuring, legal,operationalLegalStructures PE/Hedge Fund PE Fund PE Fund PE Fund PE/Hedge Fund
  • 53. Conclusion Opportunities for a range of distressed strategies There is international interest in these assets The returns are good Primary challenges are identifying the opportunities earlyand developing the skills to implement the strategy53