Could Europe be the new ‘Land of Opportunity’ for distressed debt?

in Industry Insights, 28.07.2014

It appears that the US is no longer quite living up to its reputation as the place where dreams are made … or at least this is the case where one emerging fund type is concerned. Distressed debt – which was 100% ‘Born in the USA’ – is now hotfooting it to Europe in what one could only describe as an industry migration. But just what is behind this passage over the Atlantic?

The changing face of distressed debt

This question has a straightforward answer. The number of non-core assets up for grabs in Europe is rocketing. Regulation and government pressure is pushing banks and other financial houses to sell off their distressed debt business, leaving the way clear for other players to step in. The amount of debt up for grabs is only set to increase in the future, as more and more banks will look to clean up their balance sheets. This brings us to another shift in the industry. Whereas distressed debt was previously the preserve of big banks, it is now hedge funds and other alternative players who are snapping up such opportunities. The face of distressed debt is changing: it is becoming European and alternative.

Snap up funds, snap up staff

Signs of the move to Europe are plentiful. Hedge funds are beefing up their European teams, with a focus on hiring restructuring and debt specialists. The migration of distressed debt from bank to fund runs parallel to a similar migration of staff. Talent in this field is concentrated in banks – where distressed debt spent its infancy – meaning most new hires come directly from the very banks who are selling off their activities in this area.

Choose your home wisely

Those investing in this kind of debt are advised to think carefully in advance about exactly where they should set up in Europe. While working with clients to find tailor-made solutions for this kind of debt, we have found that – while there are several attractive options for structuring such investments – few beat the Luxembourg Soparfi. This special purpose vehicle benefits from attractive tax planning and has long been favored for investments and transactions. It has helped make Luxembourg a hub for structuring and I believe – in the future – will make it a hub, too, for distressed debt.

1 Comment

  1. Henk van Eldik

    Thank you for the product solution George. However, you also should look at what investors can buy and for many Ucits is still the only solution for the moment. In the next 3-5 years AIFs will make their way but today it is an early call except for Institutional and educated UHNWI. Even for many multi family offices this is a bridge too far.

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