A record bull run in global equity markets and a positive fund-raising environment have seen fewer enticing opportunities for distressed and stressed credit investment managers, who have consequently found themselves concentrating more upon managing existing positions in their portfolios rather than putting as much new capital to work.
However, with cracks appearing in certain sectors, such as consumer and retail, it is generally perceived that Europe is likely to begin to offer greater yield to the distressed investor in 2019. In turn, many of the notable funds running this variety of strategy have started to build out teams in anticipation of being able to deploy more capital on subsequent opportunities.
Have they made the call too early though? In discussions with many Partners and Portfolio Managers in Europe, it appears that there is still a fair degree of uncertainty as to when precisely the market will turn sufficiently to begin presenting the flow of opportunities required to drive performance significantly and consistently above the benchmark. Nonetheless, many funds have expressed that they would still prioritise establishing strong foundations now in order to realise future gains more efficiently, and by implication adding new staff, over attempting to predict the exact moment when the market will turn. Indeed, with EurekaHedge reporting that distressed debt hedge funds continue to be the best performing strategy on a year-to-date basis (as of August 2018), it may be prudent to consider this the perfect time to join a potential ‘gold rush’.
So, what is the ideal fund to join?
There is a vast array of managers that invest in distressed situations, whether that is through individual, targeted strategies, or as part of a broader fund remit that also considers ‘performing’ credit opportunities. Some focus on a slick model designed to cut the largest loan portfolios in the market, others track individual credit names and unlock the value through deep-dive analysis, and then there are those who are interested primarily in a debt-to-equity play and may well seek to turn companies around more actively. With such a range of differing methodologies being employed under the wider umbrella of distressed and stressed credit, understanding the nuances of a particular fund’s strategy or its focus on primary versus secondary market deals is of paramount importance when considering one’s application and future career prospects.
Regardless of the idiosyncrasies of each investment manager operating in this field, it is generally agreed that there is significant over-leverage in the market and that the cycle now favours credit trading from 40-80. Consequently, it seems an especially exciting time to be part of a stressed or distressed strategy, where deal volume will be high and there should be an all the more rewarding experience for the individual investor, irrespective of level.
Altus Partners is a buy-side specialist, with a long-standing track-record of working with credit or turn-around investors. For more information please contact Charles.firstname.lastname@example.org