FUNDS: Emerging distressed funds

By bne IntelliNews March 25, 2009

Jiri Kominek and Nicholas Watson in Prague -

Hard times spell trouble for most; for a few, though, they offer great opportunities.

Finep, one of the largest residential property developers in the Czech Republic, announced in March it was setting up Avant Fund Management along with a group of three funds to begin taking advantage of semi-distressed residential assets in Prague, and it wouldn't rule out expanding into other parts of the country. "We received our licenses for two of our funds in August and we are currently eying projects in Prague for acquisition via our Avant Edge and Avant Opportunity funds, which will focus on buying off-plan units for resale into the market after completion," Avant fund manager Jarrod Epps tells bne.

Epps says Avant plans on targeting semi-distressed assets that have encountered funding or sales problems, especially focusing on those that have not been closed down by the banks. "Our strategy is based on our belief that in 24 months the Prague market will have a significant undersupply of residential units as demand begins to renew after the crisis. We want to be one of the few groups with completed units in new developments available for sale at that time."

At this point, Avant is looking to raise €60m in equity for its funds, which offer a 10-year closed-end structure with a five-year lock-in period for equity. Epps expects the list of backers to grow after the fund managers were warmly received by potential investors in London. Avant managers plan a roadshow to give presentations to other investors in New York and Asia. Avant expects a 17% internal rate of return each year for the Pure Yield fund and above 25% for the Avant Edge and Avant Opportunity Funds.

Currently, Avant has three residential projects targeted for acquisition in summer of this year, with more possibilities to follow during the second half of the year. Following the Avant Edge and Avant Opportunity funds, Avant will begin acquisitions in its Pure Yield fund, which will focus on purchasing complete, but unsold, residential units.

Epps said all the funds will focus on an element of renting the properties for a three- to five-year period, or until the local residential sales market recovers. Epps believes the market may pick up in Prague by the end of 2010 when a shortage of flats hits the market. "Our funds are positioned to take advantage of the upcoming new housing shortage, and they offer a hedge against a more extended downturn by looking at the rental market where we see rental yields increasing as supply drops over the next two years."

Epps says that unlike Warsaw and other CEE markets where there is an extensive over-supply of residential properties currently on the market or soon to be available, Prague is not home to thousands of completed empty units waiting to be sold. "There aren't many projects launching this year, and on this point we have been watching this market very closely. Effectively, we see a significant drop-off in demand; however the downturn on the supply curve is even sharper," he says.

East opportunities

Meanwhile, the Sweden-based CEE fund management firm East Capital announced it will launch in the second quarter its East Capital Special Opportunities Fund, a new fund with the aim of acquiring undervalued assets in special situations in Russia and the rest of Eastern Europe. The fund will target institutional and other qualified investors - the board of the listed East Capital Explorer AB fund has decided to invest €35m in the distressed fund - and the maximum fund size is limited to $100m. The fund term is four years.

"Capital is scarce and opportunities to buy sound companies at low valuations only stay until market conditions have normalised," says Peter Elam HÃ¥kansson, chairman and head of portfolio management at East Capital. "The ability to act fast, across markets and sectors is crucial to capitalise on these opportunities."

The fund will target investments with both a clear trigger for revaluation and exit opportunity within four years. As this strategy implies, East Capital says whenever appropriate, it will take a more active role in running the company through board representation or other means. The investment focus will be listed, or otherwise traded, equity securities, but other financial instruments can also be utilised.

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