A massive distressed investment opportunity is coming — mainly in real estate and other sectors pummeled by the COVID-19 recession, some industry insiders say.
These consultants and credit managers such as Strategic Value Partners LLC call it a "once-in-a decade" investment opportunity. In a recently released white paper, the distressed investment firm, also known as SVPGlobal's founder, and CIO Victor Khosla estimates that the core opportunity set, including the high-yield, leveraged loan and U.S. direct lenders markets, currently totals $4.5 trillion worldwide.
He estimates another $2.5 trillion potential investment opportunity is coming in asset-heavy, troubled sectors such as hotels and lodging, airplane financing, power generation and infrastructure.
The debt is mainly private and involves many businesses that are sound but overleveraged, Mr. Khosla said in the white paper. SVPGlobal has $10 billion in assets under management in distressed debt investments. Other investors see opportunity as well.
At the Nov. 24 meeting of the $28.3 billion New Mexico State Investment Council, Santa Fe, Jack Koch, a partner and head of global advisory services group at real estate consultant The Townsend Group, told the council that distressed real estate investment opportunities will result in a once-in-a-decade vintage year, "given the distress we anticipate seeing as a result of the pandemic."
On the recommendation of Townsend and staff, the council committed up to $75 million to opportunistic real estate fund KKR Real Estate Partners Americas III managed by KKR & Co. Inc. The fund has a $3 billion target and KKR expects to invest some of the capital taking advantage of what it calls "cyclical dislocation," according to a Townsend memo to the council.
"Targeted property types in the midst of disruption but with attractive long-term fundamentals are student and senior housing," Townsend said in the memo. "Situational opportunities will include distressed hotels."
Indeed, the fund is expected to have a "materially higher weighting to distressed situations" than its predecessor funds, the Townsend memo said. The fund is targeting mid-double-digit net returns, the memo said.