Asset consultant bfinance surveys distressed and opportunistic strategies and finds frantic capital raising activity. But not all strategies are equal, as the pandemic means a lack of track records and increased competition in some sectors.
The current coronavirus pandemic has turned life as we knew it upside down. It is a crisis in many forms: medically, economically and even geopolitically as simmering tensions between the United States and China have been brought to the fore.
But every crisis also offers opportunities, or as British Prime Minister Winston Churchill is believed to have said as he worked with US President Franklin Roosevelt on establishing the United Nations:
“Never let a good crisis go to waste.”
This must have been on the mind of more than one fund manager as there are currently 130 launched or soon-to-be-launched strategies out there that look into distressed and opportunistic investments, according to a new report by bfinance.
“We uncovered 130 funds that are raising capital globally, so it is obviously giving people a lot of choice, but they are not all the same,” Frithjof van Zyp, Director at bfinance, says in an interview with [i3] Insights.
“The first step is to segment and see which are the more relevant sub-strategies and then to look at which ones suit a client’s requirement.”
There certainly seems to be an appetite for these types of strategies among investors.
During a webinar for clients last week, which was attended by about 20 participants, bfinance conducted a poll and found 29 per cent of participants were ‘very likely’ to invest in a distressed or opportunistic strategy over the next 12 months, while another 57 per cent said this was ‘quite possible’.
Only 14 per cent said it was ‘unlikely’, while no one dismissed the idea outright.
Bfinance identified seven sub-strategies: dislocated entries into private credit, dislocated entries into real assets, dislocated entries into public markets, evergreen opportunistic strategies, financing solutions, fund financing and secondaries, and multi-strategy.
The poll found most clients were interested in strategies that looked at dislocated entries into real assets (33 per cent), while there was equal interest in both dislocated entries into public market and multi-strategy approaches (22 per cent).
None of the participants were interested in fund financing and secondaries strategies or evergreen opportunistic strategies, while there was limited interest in the remaining strategies.
The participants were also asked if they saw any barriers to invest in these strategies and the majority (47 per cent) said the main barrier would be a lack of resources or other priorities.
Even if you look at managers that have a track record during the GFC, it is hard to put too much weight on that because the question is how representative that track record is of the situation going forward.
Another issue with investing in these strategies is that the unique circumstances we are facing today mean few managers have a relevant track record, van Zyp says.
“The first comparable that people will draw upon is the global financial crisis (GFC). And whilst that was obviously quite a shock, it was quite different in terms of what is leading to the current crisis,” he says.
“It is not a number of banks that have stretched themselves. In this case, it is more of a bottom-up, consumer-driven shock, given that everyone is having to work from home and businesses are being shut down.
“Even if you look at managers that have a track record during the GFC, it is hard to put too much weight on that because the question is how representative that track record is of the situation going forward.
“I think it is more about taking a qualitative view of the capabilities of the individuals and the capacity that they have to implement and execute these kinds of strategies. It is not just looking at the numbers, it is also looking at the softer factors. But ultimately it comes down to the team and the pedigree of the team and the particular skill set they have.”
Private credit is an area that has attracted some interest for quite a while, well before the onset of the pandemic. Because of this, van Zyp says it could be that returns will be lower as many managers are ready to invest.
“With private credit, there has been so much money that has been raised in the years leading up to this crisis that there is quite a lot of dry powder, which, one can argue, makes the space more competitive and might put pressure on the ultimate returns an investor can expect,” he says.
“We are also seeing funds that have recently closed and have a bit of a head start on deploying capital.”
Bfinance also points out in the report that not all strategies will make it through an environmental, social and governance (ESG) filter, as some strategies aim to take control over an underlying asset by forcing a company through a bankruptcy process.
“In particular, the dislocated entry and financing solutions are, in some cases, about dealing with bankruptcy proceedings and, as a result, cutting the workforce,” van Zyp says.
“From a social point of view, there could be some backlash there, whereas when you look at strategies such as financing and secondaries, it is really about extending capital to companies that are in the longer term working and profitable, but in the shorter term have a capital and financing requirement.
“So it is not necessarily about cutting workforces and things of that nature and from that perspective there is probably less of an ESG negative backlash there.”
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.