What’s the appeal of investing in distressed assets?

When it comes to embracing risk, Canada’s defined benefit pension plans aren’t just looking at infra­structure. Chronically low interest rates — and the resulting low bond yields — and anemic global growth are also motivating some to con­sider distressed assets.

Such risky assets typically include securities that produce high returns because credit rating agencies consider them to be below investment grade. The price is usually lower than their market value.

The distressed asset class also includes businesses that have major issues affecting their balance sheets. Investors that buy these companies aim to turn them around. “We’re like firefight­ers in the capital markets,” says Patrick Blott, founder of Blott Asset Management in New York City, a firm whose focus includes distressed investments. “We focus on fixing the company, so it’s more like venture capital.”

Read: 2016 Top 40 Money Managers Report: Why pension funds are turning to non-core infrastructure

The Healthcare of Ontario Pen­sion Plan sees value in distressed and opportunistic assets. “We’re looking at all those things,” said Jim Keohane, the pension fund’s president and chief executive officer, during a recent press conference in Toronto. “A lot of times . . . the asset is high quality, but the seller may be distressed and they sell at attractive prices.”

One of the main risks asso­ciated with distressed assets is company management, something that’s likely “the single most im­portant risk determinant in terms of whether you’re going to make money or not,” says Blott.

“You can take the best com­pany and the best assets in the world and you put the wrong CEO or the wrong team in place and, in very short order, you can ruin that value. You can take marginal assets and put the right person there and do wonderful things.”

But Blott cautions that when investors are assessing potential companies, it can be tricky to fig­ure out how good the management is, particularly if they’re focusing on the low price of the asset.

Read: Pension heads discuss the lessons from Canada’s public plans