NEW YORK (Reuters) - Two years after launching an energy fund, credit specialist Avenue Capital Group expects to raise around $1 billion for a similar portfolio that will focus on distressed assets in the power industry, company co-founder Marc Lasry said on Wednesday.
Investors have committed roughly $500 million to the new portfolio, Lasry, whose company has around $9.6 billion under management, said at the Reuters Global Investment 2018 Outlook Summit in New York.
Investors would have to keep their money in for five years, longer than what traditional hedge funds require but a time frame that Lasry said is critical for the kinds of investments he is making.
“There are huge opportunities there,” Lasry said, adding that returns over the coming years should be very strong.
Avenue Capital has already invested in Texas-based electric company Dynegy Inc. DYN.N and bought a power plant in California, Lasry said, citing low prices.
For 2018, he is betting that energy investments will be a hot spot.
“We think we are coming in at the trough on valuations,” Lasry said. “You can restructure and over the course of the next five years you can do exceptionally well.”
Power has become attractive partly because regulations are curbing plant construction at the same time that consumption is climbing.
Lasry said a risk for the sector is solar power and how much it offsets consumption of more traditional sources such as natural gas.
Avenue’s Energy Opportunities Fund L.P., which invests in distressed and stressed companies in the energy and utilities sector in North America, has returned roughly 15 percent this year.
Lasry also cited direct lending in Asia and aviation as good investment opportunities due to “huge dislocations”.
Loans to companies in Asia can come with interest rates of 15 percent to 20 percent, more than double the payments in the U.S. and Europe, Lasry said. The Chinese government has pulled back on lending, increasing demand for private sources of capital, but he cautioned it was best to make secured loans in countries such as Australia and Singapore based on a Chinese company’s assets there.
“There’s a huge opportunity in Asia,” Lasry said.
In aviation, Lasry said it was possible to buy used planes for around $5 million to $10 million, lend them out for a few years to airlines increasingly focused on budget travelers, and then sell the parts. Lasry said it was feasible to make 20 percent to 30 percent on such investments.
Avenue has two aviation focused funds and one of them has returned 22 percent so far this year.
For markets overall, Lasry sees possible risks from potential problems with North Korea and fallout if U.S. tax reform, one of President Donald Trump’s signature initiatives, fails.
If the Trump administration does not deliver its promised tax overhaul, Lasry said U.S. markets, especially stocks, could fall between 5 percent and 10 percent. For months stocks have notched record highs before hitting a rough patch in the last week.
To hedge his portfolio, Lasry said he would increase short index fund bets if there are indications that tax reforms will fail.
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Reporting by Svea Herbst-Bayliss and Lawrence Delevingne; Editing by Susan Thomas