Large investment firms like Blackstone Group, Lone Star Funds, Oaktree Capital and Bain Capital are buying debt at significant discounts – in some cases, as low as 30 cents on the dollar – and seeing annualized returns that can top 20 percent when the debt is resolved or resold, according to the report. In the past few years alone, PricewaterhouseCoopers estimated global investment firms have invested more than $3 billion in defaulted commercial loans.
For the vulture investors, a lot of the debt is secured by real estate – hotels, warehouses, commercial and residential. So the investor can buy the loan at a deep discount then make a profit by turning around and selling the real estate.
In one such case, Bain Capital bought a defaulted loan on an abandoned hotel, and made a big profit when the hotel was eventually auctioned for $2.2 million. Today, that property is a newly renovated apartment building in the Chinese city of Suzhou.
Funds at Bain have spent roughly $500 million acquiring hundreds of loans, according to the report. Many of those loans are secured by real estate in cities with large populations and strong economies.
China’s defaulted debt problem has been on the rise, according to the report. Banks are sitting on an estimated $899 in debt that’s been classified either nonperforming or at risk of default, and some analysts think that figure is significantly lower than the actual total.
However, the firms making the bets here are hoping that China’s economy won’t collapse and real estate values will continue to grow, even as the country’s overall economic growth slows.