As economic prospects in Europe become more challenging, family offices could do well to focus their attention on distressed debt funds, capable of making profits from difficult financial situations.
Gross returns of 15% a year, or more, can be achieved by funds which acquire poorly-rated debt from banks, keen to maintain their credit rating by finding someone else to buy their problem loans. Tougher regulation is also encouraging banks to clean up their balance sheets and it will fuel the supply of debt for distressed debt buyers.
Zech is committed to investing in the new fund on the same terms as other subscribers
This return is not as high as the 20% lately promised – and not yet proven – by private equity. But it doesn’t require leverage to produce the goods, leading to a much higher level of robustness and lower correlation compared to the economic cycle and other markets. It is one of the niche fund exploring opportunities in increasingly volatile financial conditions, sponsored by Octane Capital and distributed by agent Haven Green.
Octane is not a global brand like Cerberus Capital, Lone Star or Oaktree, but it offers debt vendors discretion and local knowledge. It operates in a niche in which it is entirely comfortable. It also has discreet support from Kurt Zech, a German multi-million dollar real estate investor, developer and entrepreneur.
In 1978 Zech, took over the running of a small family business from the second generation of his family and made it a big player. Zech Group manages hotels, industrial and construction companies, plus property. He has committed to invest in the new fund on the same terms as other subscribers after rolling into it from an earlier fund tracking internal rate of returns which approach 20%.
Around 80% of the capital invested in the fund has been returned, following a 22-month period. As well as a gross return of 15%, plus, the new fund will also target a generous yield and a rapid return of capital.
Octane’s new fund will operate in Benelux, Switzerland and Austria. But Germany will be a prime area of interest and opportunities.
Octane has received more tender invitations from banks since the start of the year than during the whole of 2018. The travails of Deutsche Bank and Commerzbank which led to abortive merger talks illustrate the strains in the German banking system.
It is not unusual for family businesses in the Mittelstand to be suffering falls in sales of 10% to 15% over a year. Amid worsening conditions, vendors remain keen to avoid the attention of regulators, who have become more hawkish following the credit crisis of 2008.
The banks want to avoid using valuable cash to top up their capital reserves and strive to keep deals under the radar. They can also be reluctant to participate in too many tough negotiations with struggling borrowers.
Robert Meyer zu Starten, director of Octane’s credit opportunity fund, says: “We deal with a lot of state-owned Landesbanks and co-operatives in Germany, and they want to deal with us because we are discreet. You can get more for your unwanted debt by widening your tender, but you can get the publicity you don’t want.”
Meyer zu Starten used to work for Cerberus Capital, one of the biggest distressed debt players in the world. His co-director Martin Hoeller used to head illiquid assets in Germany for Bank of America Merrill Lynch.
Meyer zu Starten concedes Octane lacks its firepower for corporate restructurings, but stresses it has the expertise to look at a range of financial situations.
Unlike international players: “We are happy with smaller tickets, and we are attracting the attention of institutions, as well as family offices.”
Octane typically looks for deals backed by real estate, or other hard assets.
Meyer zu Starten says the German real estate business was ticking over: “But it’s less good, we might now get five competing bidders for deals, as opposed to 15 nearer the peak of the market. A lot of forward sales have withdrawn.”