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Distressed assets with high returns draw the interest of Special Situations Funds

Investment funds focusing on unique scenarios, such as troubled assets and business revitalization, are seeing increased popularity in India, with new offerings emerging from Motilal Oswal, InCred, and Resurgent India.

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Distressed assets with high returns attract the focus of special situation funds (SSFs)
Distressed assets with high returns attract the focus of special situation funds (SSFs)

Distressed assets with high returns draw the interest of Special Situations Funds

Special Situations Funds (SSFs) are making a significant impact in India's investment market, focusing on unique opportunities arising from corporate restructuring, mergers and acquisitions, regulatory shifts, and emerging sectoral trends.

Key Features of SSFs

  1. Investment Strategy: SSFs adopt a strategic approach, targeting special situations to uncover hidden value and generate long-term capital appreciation. This is achieved through a blend of top-down macro insights and bottom-up stock selection.
  2. Investment Framework: Many SSFs, such as the Motilal Oswal Special Opportunities Fund, employ a proprietary framework like QGLP, which emphasises investing in businesses with quality, growth potential, longevity of opportunity, and a reasonable price.
  3. Flexibility and Customization: While SSFs are more thematic and less flexible than Portfolio Management Services (PMS), they offer a focused yet diversified approach for investors seeking to benefit from market transitions.

Benefits of SSFs

  1. Capital Appreciation: SSFs aim for long-term capital appreciation by leveraging special market situations.
  2. Active Management: They often utilise experienced fund managers and a research-driven process to capitalise on market opportunities.
  3. Access to Special Situations: SSFs provide access to investment opportunities that may not be available through regular mutual funds, such as corporate restructuring or emerging trends.

Comparison with Mutual Funds and PMS

Mutual Funds

  • General Investment Strategy: Mutual funds offer a broader investment strategy, typically confined to traditional asset classes like equities, debt, or gold.
  • Flexibility and Customization: Mutual funds are less flexible and less customised compared to SSFs and PMS.
  • Risk Profile: Mutual funds can offer a variety of risk profiles depending on the scheme, but they are often less aggressive than SSFs.

Portfolio Management Services (PMS)

  • Customization and Flexibility: PMS offers highly customised and flexible investment strategies, often tailored to individual investor needs.
  • Active Management: PMS provides personalised active management, with a focus on long-term risk-adjusted returns.
  • Investor Eligibility: PMS typically requires a higher minimum investment threshold (often ₹50 lakh) and is geared towards high-net-worth individuals.

Special Situations Funds (SSFs)

  • Thematic Strategy: SSFs focus on specific market situations, offering a unique investment opportunity.
  • Investment Threshold: The minimum investment in SSFs can be lower than in PMS but higher than in some mutual funds.
  • Risk Profile: SSFs often involve higher risk due to their focus on specific market situations, but they can offer significant returns if managed effectively.

Notable players in the Indian SSF market include Oaktree Capital, which has made bids for DHFL and Essar Steel in the insolvency market, and Bain Capital, a US-based asset manager with several investments in India.

Resurgent India, another active player, launched an SSF with a target of Rs 1,000 crore and an optional additional Rs 500 crore, aiming to systematically acquire, revive, and scale assets facing temporary financial or operational distress. Jyoti Prakash Gadia, the Managing Director at Resurgent India, stated that their SSF caters to this purpose.

Similarly, Cerberus Capital bid for Rs 33,000 crore stressed loans from Yes Bank, demonstrating the growing interest in the SSF sector.

SSFs are categorised as Alternative Investment Funds (AIFs) under the Securities and Exchanges Board of India (Sebi). They are exempt from diversification limits and require a minimum corpus of ₹100 crore with a mandatory three-year lock-in period on investments.

The risk-reward matrix in the AIF ecosystem is high, catering to sophisticated investors and institutional investors. However, foreign investors can also participate in SSFs subject to regulations.

The SSF industry is seeking a wider play in the magnet scheme, with SBI, Kotak, ICICI Prudential, and Aditya Birla Sun Life among the most active Indian SSF managers.

The Motilal Oswal Special Opportunities Fund is set to open on 25 July 2025, further expanding the SSF landscape in India.

  1. SSFs, like the Motilal Oswal Special Opportunities Fund, follow a strategic approach, investing in unique market situations with potential for long-term capital appreciation.
  2. In contrast to regular mutual funds, SSFs offer access to investment opportunities in corporate restructuring or emerging trends that are not commonly available.
  3. While Portfolio Management Services (PMS) provide highly customized and flexible investment strategies, SSFs require a lower minimum investment but still involve higher risk due to their focus on specific market situations.
  4. Notable players in India's SSF market include Oaktree Capital, Bain Capital, Resurgent India, and Cerberus Capital, with foreign investors also able to participate subject to regulations.
  5. The SSF industry is growing, with major Indian SSF managers such as SBI, Kotak, ICICI Prudential, and Aditya Birla Sun Life actively participating and new funds, like the Motilal Oswal Special Opportunities Fund, set to open in the future.

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