Now part of a global alternative asset management powerhouse, Asian special situations-focused firm Ares SSG is primed for larger opportunities in two of Asia’s biggest economies.
Edwin Wong, managing partner and CEO at Ares SSG, told DealStreetAsia in an interview that the firm sees potential in the real estate and financial services sectors in India and China.
Wong said, the coronavirus pandemic has driven up demand in Asia for alternative capital, particularly as banks —traditional lenders — seek to manage their risks during the crisis. “Today, most of the banks are facing a situation where the NPL [non-performing loans] numbers are picking up.”
In China, however, liquidity is not an issue, and Ares SSG’s challenge is to find a way to offer its services to real estate developers, for instance, to be part of the growth.
“A large part of what we’re looking at is around the real estate sector where they’re growing again. It’s not a stressed sector by any stretch of imagination,” Wong said. “There’s a new bond issue almost every week in Hong Kong. We’re just trying to be opportunistic and value adding around some of their initiatives that might not be addressed by either the bond market, or onshore funding sources.”
Ares SSG is one of the largest pan-Asian alternative asset managers with more than $6 billion in assets under management and more than 120 direct institutional investors. It makes credit, private equity, and special situations investments on behalf of its institutional clients.
Wong founded the firm, formerly known as SSG Capital, in 2009 with his ex-colleagues from Lehman Brothers. The Hong Kong-based firm began operating under the Ares SSG brand from July 2020, when New York-listed private equity firm Ares Management completed the acquisition of a controlling interest in it.
Ares-SSG is understood to be raising $1.5 billion for its latest Asia-Pacific focused secured lending fund.
DealStreetAsia had reported in July that SSG Secured Lending Opportunities III has already secured capital commitments worth half its target corpus, and is set for a final close next year. The investment firm’s filing with the US Securities and Exchange Commission had not specified a target for this fund.
Limited partners in the latest vehicle include the Virginia Retirement System and the San Francisco Employees’ Retirement System.
Edited excerpts of an interview with Wong:
How much have the risks gone up over the last 10 months, because of COVID-19?
We started our business during the Asian Financial Crisis, so we have had the benefit of navigating many financial crises or cycles. Certainly this dynamic is very unique. Our portfolio companies certainly have had their fair share of impact from the pandemic. The question becomes how you work with them to navigate through the crisis.
I think we have seen a healthy pickup in the performance of our companies. Everyone is in different shape and obviously different geographies make a difference.
In that sense, it also gives us a lot of data points to work with and a lot of hope that, provided the right focus and the right kind of capital — you do need a bit of capital to make sure you can navigate through the storm — there is hope at the end of the day. There are probably fewer than a dozen names that we’re intensively looking at to make sure they don’t get into breaches or defaults.
Part of what we do is there’s a lot of downside protection. Going in with a deep value thesis also helps if you are making marginal investments, one without a lot of room for error. These kind of shocks would definitely knock you out. So I think a combination of our underwriting and our asset management thesis has helped us navigate and it’s something that our investee companies appreciate.
One thing that we’ve learned with every crisis is, it’s good that you’re giving people money [but] it’s the value-add that people really appreciate, how you work with them to solve problems. We’re not the cheapest provider of capital, so if people just want cheap money, they’re always going to go somewhere else.
What were your first instincts when this particular crisis rolled out? How have you had to adapt or evolve your strategies along the way?
This wasn’t like any banking crisis, anything that you may be able to see coming. Ultimately the pandemic has an impact on the operating environment.
The way all the stakeholders behaved is not that different. When there’s a crisis, first of all your top line and EBITDA is going to start shrinking, and banks are going to start getting nervous. The question is, is there enough flexibility within your cash structure to navigate this? Is there a business model that is going to sustain through this crisis?
Nobody knows what’s going to happen, but it’s about whether you have a good business, a sound business model product that ultimately people will need to consume. Do you have that capital that will last through the downturn?
I think one thing that we have seen time and again through these cycles is that the bigger and better players actually see it as an opportunity. They will grow by acquiring, by taking over their competitors. For some, it will create a lot of stress that may or may not be beyond repair. For others, if you provide the right kind of capital, it’s a great opportunity for them. That’s how we navigate ourselves especially now with the dry powder available. Make sure you come out with the winners.
Where are the opportunities for special situations and alternative capital players such as yourself?
Generally speaking, consolidation is bound to happen across sectors. Some are more imminent than others. And again, a lot of our capital is going to be partnering up with the larger corporates that are looking to strengthen their balance sheet. They’re really looking at this as an opportunity to take themselves to the next phase of growth. We are looking at situations where some of the capital that we’re providing is going to be used for not only beefing up the cap structure but also to acquire companies.
We tend to be more active in sectors that are more capital intensive, because obviously, that means the need to borrow is higher.
Now with [tensions] between the US and China for example, you have companies looking to move back to this part of the world. There could be take-private opportunities, or relisting in this part of the world; so capital to manoeuvre those.
In India, you see a lot of stress around most sectors. In the financial sector for example, I think we want to be good partners with the leaders there to effect that turnaround.
The demand for alternative capital has only increased because of the pandemic. Part of the reason is, as we all know, in Asia, the banks continue to be the primary source of capital. And in Asia, a big chunk of that is state-owned banks. So that creates a very different dynamic as well. They tend to be much more rigid in terms of what they do and what they don’t do. So the need for alternative capital has picked up even more as banks in general are looking to curtail the risk that they have. Today, most of the banks are facing a situation where the NPL numbers are picking up.
In India, we’re very focused on the opportunities around real estate and the financial sector. Those obviously are more stressed at this point, and there’s certainly a lot of capital needed to turn it around.
In China, there are very different opportunities. A large part of what we’re looking at is around the real estate sector where they’re growing again. It’s not a stressed sector by any stretch of the imagination — you see a lot of real estate developers issuing bonds. There’s a new bond issue almost every week in Hong Kong. We’re just trying to be opportunistic and value add around some of their initiatives that might not be addressed by either the bond market, or the onshore funding sources.
What is your take on [operating in] a country like India? While everybody talks about the opportunity, there’s also some level of frustration when it comes to regulations for instance.
Those issues are not uncommon in emerging markets. There are always going to be changes, and you have to stay very local to the ground to anticipate the changes and then to react around them. The underwriting has to assume some of that change. This is not an area where you think that everything is so visible and it’s going to only go one way.
We certainly saw a bit of a euphoria a few years ago when everyone thought that with the new bankruptcy law India is the best place to put capital. And it has generated good profits for some, but you also have to bear in mind the what-ifs and how things can change.
I think some people, especially the not-so-experienced investors, look at India from the outside in and think that it’s all rosy. And then when things don’t work out they move away or leave the region.
You’ve been active in the financial services and real estate sectors in India. How big are the opportunities for you in the country?
I think it’s a large opportunity especially now, given the stress in the financial system overall. The NBFCs are in the midst of a bit of a crisis themselves. That leaves a very big playing field for alternative lenders like ourselves who have very deep and very stable capital to provide.
We’re generally sector-agnostic. We’re very much bottom-up in terms of understanding the opportunities. That could be on the restructuring side, and as companies get hit by the pandemic that could also be on the growth side as the bigger and better companies look to. Our suite of capital is wide and broad enough to address opportunities on both sides of the spectrum.
How do you see Southeast Asia, in terms of opportunities, compared to China and India?
In Southeast Asia it’s a little bit easier to originate [deals] in the sense that wealth is more concentrated in a smaller number of business groups. Having been an investor in those countries in the Asian Financial Crisis you can find a way to do good due diligence.
For example, our footprint in Bangkok is much larger than any other foreign investor. If there is an opportunity out there, chances are we’re likely to see that first, and we have the people on the ground to go in and talk to the owners and go to the field to do due diligence. It’s not a huge market in the sense that we’re not going to deploy a deal every month; we’re looking to do bigger market share in smaller countries.
In Indonesia, for example, one thing we always liked is they’re more prone to borrow in US dollars. Borrowers are just used to dealing with foreign investors, so you don’t have the same constraints or restrictions that you see in places like China or India for example. Same goes for Thailand. But again, knowing who you deal with in emerging markets is very important.
What’s your strategy for China, particularly as a player in a niche segment?
China is a market where you can never originate enough. I think our approach has always been to differentiate ourselves, to be opportunistic around the deal flows that we see. I would say, generally speaking, in China right now liquidity is not in shortage. The cost of capital is actually not that high. So you really have to pick your spots; trying to compete with everybody else — that would not be the right thing to do in China. A lot of what we do is offshore and onshore and again trying to provide a value proposition that is beyond just providing capital.
Do you see yourself doing more specialised funds, for example in real estate, private equity or infrastructure?
We have, so far, built a strong credit franchise. I think the divide between debt and equity is actually very blurred. We like to think of ourselves as financial engineers that can cross different parts of the capital structure. We’re very convinced the opportunity ahead of us is very wide. We don’t always have all the right capital to [provide all solutions]; so one of our goals is to be a more complete asset manager, to be able to provide not only a debt solution but also an equity solution.
Could you give us an example of a particular business that underwent a transformation after SSG got involved, and how SSG was different from other special situations funds in that case?
There was a situation where [the company] had already defaulted on the loan. It was a restructuring that pre-dated us by two, three years, meaning that they were stuck. We went in and completed the restructuring within, I think, six months.
We then provided more capital, new money, to accelerate the growth of the business. The final chapter of the story involves an M&A, where a third party wanted to buy into the business. So there’s distress debt, growth debt, and equity [components]. Normally we don’t touch all that in a particular situation.
Has anything in SSG’s operations changed since the merger with Ares?
The way we think about investing, and the approach that we have, has always been the same.
The scale of the platform does make a difference. Having people on the ground across all the different cities does help in terms of how we underwrite the risk, how we actually manage the risk; having people on the ground, day in, day out, talking to companies, addressing issues as they come up does give us a bit of an edge.
The reason for the deal is that it allows the firm to be even bigger and better going forward. We see a lot of opportunities in front of us. Doing it organically would take us longer to achieve our goals.
We are of decent size within Asia but we’re still small and the opportunity is way bigger. The only way to address it right away, is to team up with a global platform.