Special Situations
Reaping returns from distressed assets in the Indian mid-market
“Chaos isn’t a pit. Chaos is a ladder.” ~ Game of Thrones (2013)
In February this year, Oaktree Capital announced the closing of their $16B Opportunities Fund XII, the largest fund ever raised. It made a statement that a the market has an increasing appetite for products which address opportunistic debt or “special situations”. Shortly after, in their Quarterly Letter (March ‘25), Howard Marks stated it that in this environment, they believe non-investment grade debt offers a better bet than the S&P 500.
The bottom line for me continues to be that non-investment grade credit currently represents a better risk/return deal than the S&P 500. Other markets and sectors may be lower-priced than the S&P, but the latter continues to be treated as a riskless default solution.
As 2025 begins, I think it’s incumbent upon investors in the U.S. to take note of the following combination of factors:
1) an extended economic recovery,
2) the general predominance of optimism,
3) above average equity valuations,
4) below average risk premiums,
5) a poorly functioning governmental/fiscal mechanism, and
6) substantial geopolitical uncertainty.
I am far from ringing a general alarm bell, but investors who believe in adjusting their risk posture in response to prevailing conditions might choose at this point to somewhat emphasize defensiveness over aggressiveness. Increased allocations toward lending strategies and away from ownership strategies can play a significant part in this.
When interest rates rise fast, even good businesses start to crack under the weight of higher interest payments. Companies that might have been fine in a 2% world are suddenly stretched thin in a 5% world. That’s exactly the kind of environment where funds like Oaktree thrive. They invest their resources in finding good companies with bad balance sheets, restructuring and/or fixing them, and then exiting the position.
In the US, it’s a tried and tested model which has been delivering uncorrelated returns appreciated by LPs. In India, likewise, this model is beginning to develop. As a result of which, the likes of Oaktree have entered India.
The groundwork for this was laid almost a decade ago.
IBC and an investable asset class
The Insolvency and Bankruptcy Code (IBC), passed in 2016, fundamentally restructured India's insolvency regime. It introduced creditor-in-control proceedings, strict timelines, and the ability to liquidate unviable companies.
Pre-IBC vs Post-IBC Resolution – Key Metrics
The IBC has not fixed everything. More than 65% of cases still breach their 270-day deadline, and recoveries remain highly variable depending on the asset quality. Strategic assets like Essar Steel have delivered recoveries above 90%. Smaller, legacy industrial cases often recover less than 10%. Still, the fact that the system is functioning at all, and that it consistently produces recoveries, timelines, and liquidations, is a profound shift for a country that had no workable insolvency framework before 2016. Another big factor to consider - the IBC has noticeably altered borrower behaviour. The threat of insolvency is prompting debtors to settle or restructure earlier, contributing to a cleaner banking system. If it’s any indication, public sector banks’ gross NPAs fell from ~11% to ~3% between 2017 to 2023.
In the early years, the cleanup was driven by banks and courts. But post IBC, a full special situations ecosystem has developed. Funds, restructuring teams, private equity arms, asset reconstruction companies - all increasingly professionalized, all now competing for deals. Distress has finally become an investable asset class.
The opportunity
India’s sitting on a big pile of bad loans and broken companies. Some of it comes from the last lending boom. Some from slow clean-up. Some from the COVID shock. Depending on how you count - NPAs, bankruptcies, ARC portfolios, written-off debt - the number is well over $100 billion. Within this, steel, infrastructure, textiles, and real estate continue to dominate, but emerging sectors like structured consumer finance and renewables are beginning to feature. Unlike in the U.S., where zombie companies remain alive thanks to loose liquidity, India’s market is already moving into its active resolution phase.
On the domestic side, firms like Kotak Special Situations Fund, Edelweiss ARC, and India Resurgence Fund are leading the market. Kotak’s first fund deployed around $1 billion across debt and equity deals, recording exits in companies like TVS Supply Chain and Sanghi Industries. Edelweiss returned about 1.25x capital across more than 40 transactions. IndiaRF, the Piramal-Bain joint venture, is exiting structured investments and IPO stakes with early returns exceeding initial targets. Smaller funds like Negen Undiscovered Value Fund and ASK Special Opportunities Portfolio have also entered the scene.
Foreign interest
Foreign investors are involved but either through investment in local firms, or through a partnership with Indian firms. The reason is simple: in India, money alone does not close deals. Local trust, regulatory navigation, and operational control are the real currency. Closing a special situations investment in India often requires winning over creditor committees, unblocking litigation, and managing unpredictable promoters. None of these skills show up in a financial model, but they are decisive factors in whether returns are realized. Dozens of global funds have set up India teams or JVs: for example, ADIA committed >$500M to Kotak’s fund II, CDPQ committed $1.3B with Edelweiss ARC, and names like Apollo, Bain, Oaktree, KKR, Värde, Brookfield, Ares SSG, Cerberus, Lone Star, and Blackstone are all actively pursuing Indian deals. Additionally, regulatory bodies have been accomodative -e.g. SEBI’s special situation AIFs (2022) and RBI’s permission for 100% foreign ownership in ARCs have opened channels.
Return profiles and future outlook
Returns in this segment, when executed properly, are quite attractive. Special situations funds in India are typically targeting gross IRR in the 18–24% range. Realized money-on-money multiples cluster between 1.25x and 1.5x. Entry pricing remains favourable, with loan portfolios often acquired at 60–70% discounts to face value - far better than what is currently available in developed markets, where competition has compressed spreads even in senior credit.
From a timing perspective, India’s macroeconomy is recovering from the COVID shock and is forecasted to grow ~6%+. Banking system liquidity is ample and banks are back to profit, meaning credit is available to fund restructurings and growth of acquired businesses. Inflation and interest rates, while elevated, are within manageable range. Importantly, the government is focused on infrastructure spending and banking reforms – creating supportive demand in key distressed-heavy sectors like construction, power, and real estate.
This rising tide can lift the repaired boats. An investor who buys into a distressed manufacturing company at, say, 30 cents on a rupee, can benefit not only from fixing the company but also from secular growth in demand. In the U.S. in the 90s, the backdrop of economic recovery and low interest rates greatly aided distressed asset appreciations; similarly, Europe’s NPL investors benefited when the EU economy picked up in 2015-2018. India could be on the cusp of a multi-year growth upswing, which provides a tailwind for distressed asset recovery values.
As of now we’re in that narrow window where pricing gaps are still wide and system is still being shaped, we think those who enter now will lock in the best vintages positioned for good returns.