Special Situations at a glance
Special Situations typically involve an event-driven catalyst (or multiple catalysts) to unlock value and drive capital appreciation of performing or stressed credit. Investments can involve complex, negotiated facilities and terms agreed bilaterally with borrowers and other capital providers. Other examples are credit assets purchased at a discount to intrinsic value that are facing financial stress due to near term challenges (e.g., debt maturity, liquidity crunch) or operational stress (e.g., supply chain disruption). Credits can also have strong business models but inappropriate capital structures. Investment managers might seek to influence a company via a board seat or a restructuring committee membership, but not to control it through ownership. Special situations can perform well across market environments given cyclical and noncyclical sources of borrower stress, though generally outperforms during periods of market volatility and stress given an expanded opportunity set.
VGO
While Special Situations are an all-weather strategy, the current dislocated environment provides a particularly robust landscape for Special Situations investing, offering a wide array of opportunities driven by a confluence of macroeconomic factors, political uncertainty, and regulatory changes.
Whilst Special Situations often involve complex events, these do not imply additional risk, as they refer to investment opportunities that arise from unique circumstances that create temporary market inefficiencies and mis-pricings.
VGO is solving for complexity premium that is not immediately understood or accurately priced by the market for situations that yield predictable outcomes with downside protection, low volatility and low correlation to capital markets.
Experienced specialist investors such as VGO, are seeing the strongest investment environment for special situations, in particular the primary investment opportunity for providing flexible capital solutions, as the best is has been over the last 10 years.
Barings
The market opportunity for capital solutions is highly attractive today. Traditional lenders such as banks and public markets have retreated in the face of market volatility and capital constraints, while borrowers are facing increased leverage, higher interest costs, and looming maturities. This supply/demand imbalance of capital creates a lender friendly environment and the potential for compelling returns, which stems from sourcing and structuring bespoke financing solutions to meet what are often idiosyncratic needs of companies. We seek to deliver the “complexity premium” inherent in these solutions, which is typically +300-600 basis points over traditional direct lending.
Invesco
Invesco focuses our special situations effort in global small capitalization companies, emphasizing US and UK/European businesses. The opportunity set tends to be evergreen across different points in the economic cycle as smaller companies routinely experience challenges due to idiosyncratic reasons. That said, the special situations opportunity set amongst smaller companies has become substantially pronounced due to several reasons, notably: 1) the tremendous growth of leveraged credit markets, 2) recent issuance and maturity trends whereby borrowers took on significant indebtedness, often with lower ratings at issuance and 3) pressured debt liabilities given the floating rate nature of these loans and significant rise in base rates due to monetary tightening. As a result, we are observing an extraordinary opportunity set as a special situations investor whereby we are seeing companies which have little to no operational issues but are merely liquidity strained. This allows special situations debt investors to target equity like returns but with significant downside mitigations given these companies often simply require balance sheet repair as opposed to business model turnarounds.
AlbaCore
The current investment landscape for the AlbaCore Private Capital Solutions strategy is driven by three factors; a pick-up in M&A activity requiring some junior debt; corporates needing capital solutions; secondary opportunities and liquidity solutions. An increase in M&A activity will lead to an increased demand for tailored, flexible financing with sponsors becoming more reliant on private debt financing. Capital solutions are driven by companies needing to address pre-rate hike capital structures with the European Leveraged Loan maturity wall of over €115bn approaching in 2028. In a higher rate environment, junior credit may be an attractive solution to help right size capital structures and reduce ongoing cash burn for corporates. Further, Sponsors requiring liquidity from their portfolios to increase distributions to investors, creates opportunities for refinancings in performing, cash generating companies. We have also seen a pick-up in activity in secondary for private junior assets which offer a compelling short-dated option for the portfolio.
These three factors will drive opportunities where our background and expertise provide us a unique advantage to continue to partner with borrowers seeking flexible financing solutions.
Invesco
Invesco’s $40+billion AUM private credit platform is one of the largest global investors in corporate loans. The platform is entirely private side, which means that we are able to access enhanced levels of private information from borrowers and perpetually augment our proprietary credit library which follows 2000+ issuers in the market. We also maintain one of the largest credit research teams evaluating corporate loan borrowers in the market as well as a dedicated team of loans sourcers/traders with extensive relationships and market awareness given we are one of the largest counterparties of loans trading in the world. All of these features are of considerable value to our dedicated distressed & special situations team which is fully integrated into our broader private credit platform. While the special situations opportunity set in small capitalization companies is extremely attractive from a risk/return perspective, the space also has natural barriers to entry given the difficulty sourcing opportunities, challenges with diligence given the level of opaqueness of borrowers, and trouble executing positions given minimal trading of these loans. Our broader platform significantly assists on each of these considerations as our special situations team benefits from access to the dynamically updated proprietary radar of opportunities, our large sector-based credit analyst team provides extensive contacts at both borrowers but also competitors, suppliers and other industry contacts to assist with diligence, and our dedicated trading team has deep relations and ability to build positions in credits. This is particularly differentiated given the largely boutique competitor set we find in our target market.
AlbaCore
Investment team members come from a variety of backgrounds, including investment banking, restructuring, buy-side both in the pension and private sectors, private debt, performing liquid and opportunistic credit strategies. As a result, the team has developed and nurtured trusted networks and strong individual reputations with issuers, sponsors and advisors. Investment idea generation and private deal sourcing is a continuous process and AlbaCore is in constant dialogue with company management teams, sponsors, business owners, banks and advisors about new opportunities and general market trends. In a relationship driven market, the Firm’s collaborative approach, combined with deep and longstanding connections, facilitates strong deal flow and bespoke investment opportunities.
The investment team will meet weekly to discuss pipeline opportunities, business selection, sponsor activity, the M&A and refinancing pipeline, relative value across opportunities, and to share any competitor insights, concluding each meeting with specific action items to capitalize on any opportunities. Other agenda items include a summary of the overall market conditions (including insights on the liquid credit and equity markets) and observations from relevant company performance reviews should there be valuable read-across to other situations. As a firm operating in both liquid and private large cap markets with a focus on sponsor-backed opportunities, we have coverage of sponsors though our origination and investment teams.
Barings
Our Capital Solutions strategy takes an “all-weather” approach to credit investing with a flexible mandate to migrate with the market cycle to find attractive opportunities. The team leverages the broader Barings $350B investment platform to deliver the best of the firm’s private and public market opportunities. To deliver the complexity premium, it is critical to have the ability to originate deals that often are in short supply and/or difficult to source. An origination network able to access capital seekers, particularly those with needs that may be unconventional, often consists of a mix of banks and intermediaries; restructuring, advisory and legal firms; global sponsors; clients; and members of personal, company and affiliate networks. This level of breadth and depth is critical in our ability to access deals, ultimately positioning us to be highly selective in constructing our portfolios. We have been investing in this market since 2008 over multiple cycles and across a wide range of industries. We have deep experience digging deep into these types of situations, analyzing their inherent risk, and pricing it appropriately.
VGO
VGO is led by a senior investment team with deep expertise in investing across sectors and jurisdictions.
With more than 100 years of combined professional experience across the capital structure, specialized in exploiting market inefficiencies by creating highly structured investments and completing complex restructurings across multiple jurisdictions and sectors, the senior members of the investment team have built a large network of relationships providing extensive access to non-competitive and off-the-run quality investment opportunities. By combining its established origination network with in-house origination, driven by creative thinking, VGO believes that it is well placed to anticipate and develop thematic investment opportunities across several geographies and industries, and to build contrarian investment views on asset classes or sectors.
Since inception, VGO has built a proven track record of execution excellence and has successfully closed several highly complex investments under strict deadlines, including corporate recapitalisations, the acquisition of assets and secured loan portfolios in Europe with a total transaction value in excess of $2.7 billion.
VGO focuses on a variety of middle market corporate credit, hard-asset and select opportunistic investments with equity or equity-like upside. VGO focuses on deals that “fall through the cracks” and are difficult to source, analyse or execute and the VGO Investment Team has both the experience and tenacity to turn complexity and into a value driver.
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