The increasingly dismal markets are presenting a unique opportunity for those with cash to shop for distressed securities that will potentially increase in value again. Case in point: John Paulson. Yes, that would
the John Paulson, whose funds made billions of dollars last year by betting agasinst US subprime mortgages, and who generated returns of 590% and 352% in two of his funds.
Paulson has a plenty of cash and according to the
FT, he’s made it known that while he is still extremely bearish on the US market, his Recovery fund (which will be launched on Oct 1) will be on the lookout for buying capital issued by institutions scrambling to raise capital. Paulson believes that the
golden moment for buying distressed securities is still not here, but a handful of opportunities are already appearing on the horizon.
Paulson is standing in a long queue of managers running to the recession all-you-can eat buffet. For even as countless investors have been off-loading their distressed debts, others have been mopping them up. Pimco, the biggest manager of bond funds in the
world, is reportedly raising upto $5 billion to invest in mortgage-backed debt. According to
Bloomberg, Pimco, alongwith Blackrock and TWC Group Inc. are buying securities whose value has plummeted; they believe these securities will rebound based on the value of the underlying assets and the ability of borrowers to repay their loans. And the interest
is not limited to mortgage backed securities: investors are also looking into all kinds of distressed assets – commercial loans, credit cards, and auto loans.
Banks have desks especially targeted towards distressed markets. BNP just created a new distressed finance group that will look for undervalued assets, which can be purchased at a pretty discount for their investors – an exercise variously referred to as
distressed debt trading, rescue financing and turnaround investing. Private equity funds are also, of course, front and center in aggressively seeking troubled companies with good fundamentals, viewing them as the next big opportunity in the market.
Recovery fund, rescue financing … they all sound like rather philanthropic undertakings. But it’s business all the way in these profit seeking deals, albeit one that does result in some recovery, some rescue.