(Bloomberg) -- Root Capital, a Rio de Janeiro-based firm specializing in credit, is launching a distressed-debt fund as filings for bankruptcy protection reach record highs in Brazil.
“We continue to see stress in Brazil’s credit markets, the companies continue to go broke, the agribusiness sector is horrible, and the interest rates that people thought would start to fall now are going up again,” said Rafael Fritsch, partner and chief investment officer at Root Capital. “That puts more pressure on companies, generating a need for immediate liquidity.”
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The plan is to raise about 500 million reais ($91.3 million) from local Brazilian investors this year, and then launch the fund next year for offshore investors, with the goal of getting at least $100 million more, he said.
The fund, Special Situations IV, will invest in distressed corporate debt and legal claims from companies and against governments in Brazil, including from states and cities. The fund aims to buy assets in a two-year period and will have a duration of about four years, Fritsch said.
From the US to Europe to Australia, interest rates are starting to fall, while in Brazil a new monetary-tightening cycle started a month ago with rates that already were high, at 10.5%. Brazilian firms are struggling and filings for bankruptcy protection are at record levels, according to data provider Serasa Experian. The number of filings through August reached 1,480, 72% more than in the same period last year.
“This is one of the best times ever to buy distressed assets in Brazil,” Fritsch said. Private-credit funds that raised money this year are mostly short-term, giving back money to investors on the same day after withdrawal request or 10 days at most, and those funds buy mostly debt from high-grade companies that are paying compressed spreads.
“Those high-liquid funds can’t buy illiquid assets, so there is little capital available for an increasing number of distressed assets,” he said.
The goal is to generate returns of 12% to 15% plus the interbank interest rate DI, Fritsch said. The current DI is around 11%. The fund will be sold to institutional and retail investors, and the minimum investment is 25,000 reais.
Root Capital had net inflows of about 1.32 billion reais this year, and has about 4 billion reais in assets under management in all kinds of private credit funds, including some investing in infrastructure, high-grade, high-yield and distressed bonds.
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