DBS to be anchor investor in a special situations debt fund by Muzinich Asia Pacific

INDUSTRY watchers are seeing special situations funds gain ground on the back of the global health crisis, and as companies seek to access a wider spectrum of financing sources.

The comments come as DBS announced on Thursday that it will be the anchor investor into a special situations private debt fund by Muzinich Asia Pacific. It is believed to be the first anchor investment by a local bank in this space.

South-east Asia's largest bank will pump in up to US$200 million or 40 per cent of the total fund size, whichever is lower. It will also have representation on the fund's investment committee and advisory committee.

The investment into the private debt fund is in line with DBS’ strategy of investing in new revenue and growth opportunities arising from companies that may face temporary stress from the Covid-19 pandemic, but have a healthy core perceived to be worth investing in.

Stuart Last, EY Asean financial services strategy and transactions leader, said: “We’ve observed increasing momentum in special situations funds as global private equity and banking institutions seek to support businesses. There is a growing trend of such funds in Singapore and Asia-Pacific.”

He noted that as capital markets mature in the Asia-Pacific, more companies are seeking to access a range of funding across their capital structures beyond traditional debt and equity financing.

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Thilan Wickramasinghe, head of research at Maybank Kim Eng, concurred on this growing trend. “Given the still-significant levels of loans under moratorium and restructurings around the region plus the risks associated with some of them coming out of these arrangements too early, special situations funds may see increased adoption,” he said.

For banks, involvement with these vehicles may offer synergies with their broader businesses from fee and interest income opportunities, added Mr Wickramasinghe.

Such special situations funds are not new, with several in the market going back decades. While their focus may differ in terms of markets, asset class and industry, these funds typically aim to profit from the anticipated recovery of a stock or some other asset whose price has been depressed by an unusual event, such as Covid-19.

The Muzinich APAC Private Debt Fund which DBS invested in is focused on private debt solutions targeted at lower middle-market companies and is managed by Muzinich and Co, a privately-owned international investment firm founded in New York in 1988. It has total assets under management amounting to US$39.3 billion.

The fund aims to generate high recurring cash income with capital appreciation potential while minimising credit impairments, build a diversified portfolio across geographies and industries and incorporate an Environmental, Social and Governance (ESG) conscious approach towards investments.

In a statement, DBS said that the investment will offer the bank growth exposure to recovery opportunities in APAC, which is one of the world's fastest-growing regions, as well as extend and diversify credit risk participation beyond DBS's traditional debt portfolio.

It will enable more active involvement in the fund activities to build up product know-how in the special situations space, DBS added. Its ESG-focused investment approach also aligns with the bank's emphasis on sustainable financing.

Piyush Gupta, CEO of DBS, said: "The special situations space is already well-established in the US and Europe. But in the Asia-Pacific, there is still room for further penetration, especially now, when more compelling opportunities arise in Asia as it gradually recovers from the pandemic."

He added that the fund can play an integral role in bridging the financing gap faced by businesses that have been dislocated by the disruptions, complemented by its fixed income franchise in deal sourcing and meeting more bespoke funding and investment needs across Asia.

Other such special situation funds in the market include private equity firm Apollo Capital Management, which raised about US$2.34 billion in its latest dislocated credit vehicle earlier this year. It seeks to purchase cross-asset credit risk in a period of broad-based market stress.

Another is KKR, which last year renamed its Special Situations Fund III as the Dislocation Opportunities Fund, to scoop up corporate and asset-backed debt. It raised US$2.8 billion in eight weeks.

While the above funds seek to leverage on the Covid-19 situation, there are others in the market that have been around long before the pandemic, such as Fidelity’s Asian Special Situations Fund with a size of about US$4.4 billion which started in 1994. 

EY’s Mr Last pointed out that when more private equity and banking institutions come into the special situations space, it maximises the financing options available to companies, particularly those affected by the pandemic. 

“With the extra financing sources companies will have a better opportunity to pull through the crisis,” he said. “Companies will also benefit from greater flexibility in securing capital structures that best meet their specific needs.”