Opportunities for Distressed Funds in South Africa

Opportunities for
Distressed Funds in
South Africa
April 2013
Eric Levenstein & Shayne Krige
Follow this event on Twitter: #WerksmansDistressedFunds

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Business Rescue
Practice Group
Investment Funds
Practice Group
Eric Levenstein Shayne Krige

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 Implement
Distressed Strategies in South Africa
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Defining Distressed Assets
A distressed asset is any asset that is
undervalued.

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Defining Distressed Assets
‣ Shares, bonds or debt instruments issued by
companies that are either already in default,
under bankruptcy protection or heading towards
such a condition.
‣ In the US, fixed income debt is considered
distressed when:
‣ yield to maturity > 1,000 basis points above
the risk-free rate of return; or
‣ rated CCC or worse.

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Defining Distressed Private Equity
Distressed private equity investors believe that an
asset is not as bad as the market believes it to be
and either the company will survive or there will be
enough money upon liquidation to cover the
original investment.

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Defining Distressed Private Equity
High Risk so not suitable for
retail investors.

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Distressed Private Equity Strategies
DPE Strategies
Non-Control Control
Single Credits Pools
Passive
Trading
Active
Trading
Restructure Turnaround

Single CreditsSingle CreditsSingle CreditsSingle Credits Pools/NPL
Non-Control/Special SituationsNon-Control/Special Situations Control/TurnaroundControl/Turnaround Distressed Debt
Passive Trading Active Trading Restructuring Turnaround
Summary
Invest in companies
that will rebound on
their own.
Take a non-
controlling interest,
influence the
process.
Obtain controlling
interest,
restructure.
Obtain controlling
interest, improve
operations.
Purchase packages
of assets from
banks, settle.
Instruments Debt/Equity Debt/Equity Equity/Debt Equity/Debt Debt
Skills Required Trading, credit
Trading, credit,
restructuring
Trading, credit,
restructuring, legal
Trading, credit,
restructuring, legal,
operational
Legal
Timeframe
Days or weeks
>2 years
1-2 years 2-5 years 2-5 years or longer To maturity
Returns 12-18% 15-20% 18-25% 20-25% 25% / 1.75x
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Single CreditsSingle Credits Pools/NPL
Summary
Invest in companies
their own.
Take a non-
influence the
process.
Obtain controlling
interest,
restructure.
Obtain controlling
interest, improve
operations.
Purchase packages
of assets from
banks, settle.
Trading, credit,
restructuring
Trading, credit,
Trading, credit,
operational
Legal
Timeframe
Days or weeks
>2 years
Returns 12-18% 15-20% 18-25% 20-25% 25% / 1.75x
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Alternative Funds

Summary
Invest in companies
their own.
Take a non-
influence the
process.
Obtain controlling
interest,
restructure.
Obtain controlling
interest, improve
operations.
Purchase packages
of assets from
banks, settle.
Trading, credit,
restructuring
Trading, credit,
Trading, credit,
operational
Legal
Timeframe
Days or weeks
>2 years
Returns 12-18% 15-20% 18-25% 20-25% 25% / 1.75x
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Alternative/
Private Equity Funds

Summary
Invest in companies
their own.
Take a non-
influence the
process.
Obtain controlling
interest,
restructure.
Obtain controlling
interest, improve
operations.
Purchase packages
of assets from
banks, settle.
Trading, credit,
restructuring
Trading, credit,
Trading, credit,
operational
Legal
Timeframe
Days or weeks
>2 years
Returns 12-18% 15-20% 18-25% 20-25% 25% / 1.75x
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Summary
Invest in companies
their own.
Take a non-
influence the
process.
Obtain controlling
interest,
restructure.
Obtain controlling
interest, improve
operations.
Purchase packages
of assets from
banks, settle.
Trading, credit,
restructuring
Trading, credit,
Trading, credit,
operational
Legal
Timeframe
Days or weeks
>2 years
Returns 12-18% 15-20% 18-25% 20-25% 25% / 1.75x
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Summary
Invest in companies
their own.
Take a non-
influence the
process.
Obtain controlling
interest,
restructure.
Obtain controlling
interest, improve
operations.
Purchase packages
of assets from
banks, settle.
Trading, credit,
restructuring
Trading, credit,
Trading, credit,
operational
Legal
Timeframe
Days or weeks
>2 years
Returns 12-18% 15-20% 18-25% 20-25% 25% / 1.75x
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Prerequisites for DPE Strategies
Access to banks
Law of Contract

Summary
Invest in companies
their own.
Take a non-
influence the
process.
Obtain controlling
interest,
restructure.
Obtain controlling
interest, improve
operations.
Purchase packages
of assets from
banks, settle.
Trading, credit,
restructuring
Trading, credit,
Trading, credit,
operational
Legal
Timeframe
Days or weeks
>2 years
Returns 12-18% 15-20% 18-25% 20-25% 25% / 1.75x
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Access to financial information
Market
Shareholder activism (Companies law)

Summary
Invest in companies
their own.
Take a non-
influence the
process.
Obtain controlling
interest,
restructure.
Obtain controlling
interest, improve
operations.
Purchase packages
of assets from
banks, settle.
Trading, credit,
restructuring
Trading, credit,
Trading, credit,
operational
Legal
Timeframe
Days or weeks
>2 years
Returns 12-18% 15-20% 18-25% 20-25% 25% / 1.75x
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Bankruptcy Law
Access to financial information
Companies Law

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Legal Prerequisites for Control Strategy
 The law must stress re-organising a
company so it can continue to operate
instead of focusing on liquidating a
company (US 1978 Chapter 11 of
Bankruptcy Code).
 Necessitates a deep knowledge &
experience in bankruptcy law.
 Supply of transactions.

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Structuring Points
US & Europe
Emerging Markets
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Corporate Fund Structure
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Management
Agreement
Management
Agreement
Offering
Memorandum
Investors
M
Shares
P
Shares
Distressed
Assets
Administrator
Bank
Registered
Agent
Custodian
Advisor
Advisory
Agreement
Custodian
Agreement
Banking
Agreements
Registered Agent
Agreement
Administration
Agreement
Onshore
Manager
Offshore
Manager
Fund
Company

Limited Partnership Fund Structure
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Management
Agreement
Investors
Distressed
Assets
Administrator
Bank
Custodian
Onshore
Advisor
Advisory
Agreement
Custodian
Agreement
Banking
Agreements
Administration
Agreement
Onshore
Manager
Offshore
General
Partner
Limited
Partnership
Limited Partnership Agreement
Offering Memorandum
Unlimited Liability Limited Liability

US & Europe
Emerging Markets
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Location of Private Equity Firms Considering DPE
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Preqin, Funds in Market Report
54%46%
US
Europe

Distressed Private Equity in the US and Europe
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Investor appetite for distressed
private equity investments is
increasing.

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Distressed private equity raised
$92bn in 2007/2008 in US

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2011 2012
Number of DPE Funds 64 68
Total Commitments Sought $47.8bn $49.2bn

2011 2012
Number of DPE Funds 64 68
Total Commitments Sought $47.8bn $49.2bn
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Record Year

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Average fund target size is:
$724m (US)
€478m (EU)

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Name Target Size
GSO Capital Solutions F $5bn
Cerberus Institutional Partners V $3.75bn
European Principal Finance Fund II €2.5bn

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TPG Opportunities Partners II (Texas Pacific Group)
raised $2.1bn in December 2012 ($600m over
target). Fund focusses on control, non-control and
NPL strategies.

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KKR (Kohlberg Kravis Roberts) has raised
$60bn in 10 years.
Oaktree has raised
$53bn in 10 years.

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28% of new funds
being raised by first time
managers.

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Distressed Debt
43% Special Situations
37%
Turnaround Funds
20%
Distressed Debt
Special Situations
Turnaround Funds

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As at December
2012,
Turnaround Strategy
is the most popular
with investors.

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Why is Europe Lagging the US?
 Each country has its own bankruptcy laws making cross-EU
bankruptcies difficult to navigate.
 Restrictive employment laws (Marks & Spencer)
 Lower supply of transactions because:
banks not enforcing because less pressured into writing off
loans or selling at discount and PR nightmare;
Insolvency rates are actually at a 30-year low in Europe.

US & Europe
Emerging Markets
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Challenges for DPE in Emerging Markets
 Emerging markets ignored by
large houses.
 Lack of knowledge of bankruptcy
and commercial law.
 Untested new legislation.
 Short supply of transactions.
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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.
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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 credit
rights.
 Opportunities arise.
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NPL Strategies in Emerging Markets
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Most countries
outside Asia lack
active NPL market.

Asia
 DPE market created by 1990’s Asian crisis.
 Currency devaluations and capital flight.
 Governments required loan write-downs.
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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 deals
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Asia - China
 China - Mostly NPL but now single credit non-control
opportunities.
 Additional supply from struggling foreign institutions
unloading their Asian holdings.
 However, systemic regulatory issues made for thinner
trading volume.
 Investor recourse in bankruptcy remains unclear.
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Emerging Europe
 One of the most distressed regions across the globe.
 Rapid escalation in foreign currency-denominated
borrowing.
 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 more
on turnaround strategies.
 Countries with bankruptcy laws that support free
enterprise the focus:
Ukraine, Hungary, Turkey, Czech Republic;
Not Russia, Bulgaria, Romania.
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Africa
 Investors worried that:
Lack of developed business rescue regimes;
Lack of legal certainty including from corruption
 BUT, this coupled with entry barriers creates
opportunities for local managers that understand the
landscape.
 Little consumer debt and outside South Africa small
market for NPLs so focus on turnaround strategies.
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South Africa
 Best-placed in Africa for implementation of all DPE
strategies:
Relatively developed NPL market;
Active markets for non-control strategies;
Skilled traders;
Skilled corporate and legal personnel for turnarounds;
New business rescue regime.
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THANK YOU
Shayne Krige
April 2013
Nothing in this presentation should be construed as formal
legal advice from any lawyer or this firm. Readers are advised
to consult professional legal advisors for guidance
on legislation which may affect their businesses.
© 2011 Werksmans Incorporated trading as Werksmans
Attorneys. All rights reserved.

South Africa - Business Rescue Regime
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Single CreditsSingle CreditsSingle CreditsSingle Credits Pools/NPL
Impact of Business
Rescue
Expect increased
number of
companies that
rebound.
Companies Act
facilitates
shareholder
activism.
Buys time to
restructure.
Buys time to
improve operations.
No change.
Post-
commencement
financing.
Post-
commencement
financing.
Post-
commencement
financing.
Post-
commencement
financing.
Ability to influence
process through
practitioner.
Ability to influence
process through
practitioner.
Entry Point
Predominantly
Equity Markets,
some debt
Debt and Equity
Markets
CIPC business
rescue notices
Bus rescue
practitioners
CIPC business
rescue notices
Bus rescue
practitioners
Connections at
banks
Trading, credit,
restructuring
Trading, credit,
Trading, credit,
operational
Legal
Structures PE/Hedge Fund PE Fund PE Fund PE Fund PE/Hedge Fund

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 early
and developing the skills to implement the strategy
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Opportunities for Distressed Funds in South Africa

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