Arman Harutyunyan, cofounder at AJX, facilitating millions in private placements and specializing in distressed assets & emerging markets.
Distressed assets have long been considered the domain of institutional investors who have large cash balances on hand.
Yet I think today’s economic climate presents a special opportunity for savvy investors to be involved in distressed deals in concert with billion-dollar funds, earning substantial returns without having to maintain an enormous balance sheet.
Rising interest rates, tightening credit markets and liquidity shortages are the hallmarks of the 2024-and-beyond economic landscape. I believe the conditions that have already pushed even the most high-visibility investment vehicles to sell distressed assets at all costs are helping to create the ideal backdrop for the right-stuffed investors to find and draw on institutional-quality co-investment opportunities.
While liquidity issues and operational inefficiencies become significant concerns for banks and other financial institutions, investors are presented with opportunities to come in and capture the value of mispriced assets.
Through preparation, shrewd networking and due diligence, investors can uncover concealed value and achieve large returns in distressed markets.
Why Distressed Deals Are More Appealing Than Ever
Several macroeconomic factors have come together to make distressed properties among the most profitable investment deals of the decade.
The universe of distressed commercial real estate in the United States stood at $85.8 billion as of the end of 2023, and struggling office assets were largely responsible for the increase. The commercial real estate market, and office buildings in particular, have experienced huge valuation losses due to remote work trends and economic uncertainty.
While this has been the case, private equity fundraising has fared far worse, according to McKinsey, with a 24% year-over-year decline in traditional commingled funds in 2024—its third consecutive year of loss.
High interest rates and chronic inflation have also led to an increase in debt defaults and bankruptcy filings, causing a boom in distressed purchases. Financier Worldwide says the restructuring and insolvency market has seen increased activity as firms cannot service their debts.
I believe these trends present opportunities for investors who are willing to navigate challenging distressed situations and acquire assets from involuntary sellers at prices possibly below market value.
Strategies For Finding And Accessing Distressed Deals
Establishing relationships with institutional investors is one of the best ways of accessing distressed deals. Look to gain relationships with private equity firms, venture capitalists, sovereign wealth funds and hedge funds that have distressed portfolios, which can all lead to off-the-beaten-path investment opportunities.
Investors who introduce themselves as solid co-investment partners can provide liquidity solutions or access to capital, making them attractive partners in distressed transactions.
Furthermore, family offices, which I find usually have large amounts of money but little insight into distressed asset deal flow, are another opportunity for partnership. Partnering with family offices can help investors close the gap between the availability of money and sourcing distressed deals.
Another vital skill is monitoring secondary market action, in which opportunities that are distressed recur frequently. Private equity secondaries, for example, offer the possibility to buy limited partner (LP) interests at below-cost prices.
When LPs seek early redemptions in response to liquidity needs, investors can step in and acquire quality assets at sub-intrinsic-value prices. Similarly, secondary markets for venture capital provide a means to invest in late-stage ventures where early-stage investors desire to get out so that new investors may participate in exciting opportunities at attractive prices.
In real estate, distressed properties are becoming more common on the market as banks, investors and real estate investment trusts (REITs) dispose of properties due to declining credit. Investors with the capability to perform rigorous due diligence and act with haste can acquire distressed property at a deep discount.
Utilizing off-market knowledge improves an investor’s ability to spot distressed situations prior to gaining mass popularity. Talking with high-net-worth individuals on sites like LinkedIn, investor WhatsApp communities and exclusive investment groups also all have the potential to lead to sole, off-market listings.
Additionally, with the aid of powerful data analytics and data scraping tools provided by AI, investors can track fund flow and detect warning signs prior to the market.
Managing Risks In Distressed Investments
Whereas distressed assets do have great upside potential, there are also attendant risks that should be properly addressed. Not everything that is priced cheaply qualifies as a distressed asset; there are some whose discount is deserved, such as structural flaws, regulatory problems or market obsolescence. Investors must analyze carefully to establish that the inherent problems of the asset are repairable and there is a clear path to creating value.
This is why comprehensive due diligence is a key part of the distressed investing process. For a complete assessment of an asset’s condition, you should check financials, liabilities and any potential legal issues. Investors have to balance whether an investment can be justified on the fundamentals of the asset or if distress itself is just one symptom of larger, more existential issues. Professional legal and finance counsel can aid you in untangling complex distressed transactions and dodging surprises.
Another critical aspect of successful distressed investing is to devise a clear exit strategy prior to investing capital. Investors need to have a specific plan for divesting the asset such as probable timelines, desired returns and backup strategies.
Whether selling to another investor, restructuring the asset or holding to benefit from appreciation, having a guide ensures investments are kept in conformity with long-term goals.
Translating Market Turbulence Into Profitable Investments
The combination of economic conditions—like rising interest rates, liquidity shortages and institutional selling—has consolidated distressed assets as one of the most lucrative investment strategies for the next couple of years. Investors who acquire a full picture of market inefficiencies and distressed asset dynamics can translate economic turbulence into profitable investments.
Investors can safely tread the distressed investing landscape by embracing an active strategy, leveraging privileged networks and responding to data-driven intelligence. As institutions keep selling off distressed assets, I believe the ones with the intelligence and agility to take advantage of the opportunities will be the future market leaders.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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