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The coronavirus crisis has resulted in an unprecedented number of defaults and presents an opportunity of a life time for distressed debt investors. Where are the opportunities and how should investors allocate capital both domestically and internationally?[vc_quotes layout=”accordion” quotes=”%5B%7B%22name%22%3A%22Victor%20Khosla%22%2C%22job_role%22%3A%22Founder%2C%20SVP%20Global%20(United%20States)%22%2C%22content%22%3A%22Victor%20Khosla%20established%20SVPGlobal%20in%202001%20and%20has%20built%20it%20into%20one%20of%20the%20major%20firms%20in%20distressed%20debt%20and%20private%20equity%20investments%20with%20%248.4%20billion%20in%20assets%20under%20management.%5CnKhosla%20has%2029%20years%20in%20the%20industry.%20He%20got%20his%20start%20at%20Citibank%20(1989-1993)%20and%20subsequently%20built%20and%20managed%20the%20distressed%20proprietary%20trading%20business%20at%20Merrill%20Lynch%20(1993-1998).%20At%20the%20time%20of%20his%20departure%20from%20Merrill%20Lynch%2C%20Khosla%20had%20investment%20authority%20for%20%242%20billion%20in%20corporate%20and%20real%20estate%20investments%20and%20headed%20a%20team%20of%2040%20analysts%20and%20traders%20based%20in%20New%20York%2C%20Tokyo%2C%20London%20and%20Hong%20Kong.%20After%20leaving%20Merrill%20Lynch%2C%20he%20had%20leadership%20roles%20at%20two%20well-known%20funds%3B%20he%20was%20president%20of%20Cerberus%20Capital%20(1998-1999)%20and%20ran%20MooreSVP%20(1999-2002)%2C%20a%20JV%20with%20Moore%20Capital%2C%20which%20invested%20in%20distressed%20debt%20in%20Japan.%5CnKhosla%20graduated%20with%20a%20first%20class%20Bachelors%20of%20Commerce%20(Honors)%20degree%20from%20Delhi%20University%2C%20a%20MA%20in%20Economics%20from%20Vanderbilt%20University%2C%20as%20well%20as%20a%20MBA%20from%20the%20University%20of%20Chicago.%20He%20is%20a%20member%20of%20the%20management%20council%20at%20the%20University%20of%20Chicago%20Booth%20School%20of%20Business.%5Cn%22%2C%22image%22%3A%2231926%22%2C%22linkedin%22%3A%22%22%7D%5D” title=”Speaker” el_class=””][vc_quotes layout=”accordion” quotes=”%5B%7B%22name%22%3A%22Amanda%20White%22%2C%22job_role%22%3A%22Director%20of%20institutional%20content%2C%20Conexus%20Financial%20(Australia)%22%2C%22content%22%3A%22Amanda%20White%20is%20responsible%20for%20the%20content%20across%20all%20Conexus%20Financial%E2%80%99s%20institutional%20media%20and%20events.%20In%20addition%20to%20being%20the%20editor%20of%20Top1000funds.com%2C%20she%20is%20responsible%20for%20directing%20the%20global%20bi-annual%20Fiduciary%20Investors%20Symposium%20which%20challenges%20global%20investors%20on%20investment%20best%20practice%20and%20aims%20to%20place%20the%20responsibilities%20of%20investors%20in%20wider%20societal%2C%20and%20political%20contexts.%20She%20holds%20a%20Bachelor%20of%20Economics%20and%20a%20Masters%20of%20Art%20in%20Journalism%20and%20has%20been%20an%20investment%20journalist%20for%20more%20than%2025%20years.%20She%20is%20currently%20a%20fellow%20in%20the%20Finance%20Leaders%20Fellowship%20at%20the%20Aspen%20Institute.%20The%20two-year%20program%20seeks%20to%20develop%20the%20next%20generation%20of%20responsible%2C%20community-spirited%20leaders%20in%20the%20global%20finance%20industry.%22%2C%22image%22%3A%2231864%22%2C%22linkedin%22%3A%22https%3A%2F%2Fwww.linkedin.com%2Fin%2Famanda-white-101a7515%2F%22%7D%5D” title=”Moderator” el_class=””][vc_empty_space height=”10px”]
Key takeaways
The high yield and leveraged loan market size has doubled since the GFC.
Today prices will not fall as low as they did in the GFC. This opportunity set is not as deep as 2008, it is a 3 to 6-month window.
We believe the European trough is lower and the recovery is longer.
It is important to decide what not to do:
In certain regions such as France or Italy, the laws are not conducive to the restructuring process
In emerging markets it can be extremely difficult to seize the steering wheel and navigate the restructuring journey
There is a lot of low hanging fruit in restructuring from an operational perspective.
In the last 8 years there has not been huge opportunity or activity in the distressed space, but in the last 4 months the market has exploded.
In 2008 the rising tide lifted all boats. Today, you must be smarter, more focused and more skilled to invest successfully.
The distressed space offers a very comfortable discount cushion, which alleviates risk if the recovery is slower than hoped.
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Poll results
Are you increasing your allocation to distressed debt opportunities as a result of COVID-19?[vc_line_chart x_values=”” values=”%5B%7B%22title%22%3A%22Yes%20(43%25)%22%2C%22y_values%22%3A%2243%22%2C%22color%22%3A%22blue%22%7D%2C%7B%22title%22%3A%22No%20(43%25)%22%2C%22y_values%22%3A%2243%22%2C%22color%22%3A%22pink%22%7D%2C%7B%22title%22%3A%22Unsure%20(14%25)%22%2C%22y_values%22%3A%2214%22%2C%22color%22%3A%22sandy-brown%22%2C%22custom_color%22%3A%22%230088cc%22%7D%5D”]
The Florida State Board of Administration has made some strategic moves to take advantage of opportunities in the dislocation, including in private equity, distressed debt and active listed equities.. But CIO, Ash Williams, is concerned about the underlying real economy.
This research studies the interaction between economic decisions and epidemics. The model implies that people’s decision to cut back on consumption and work reduces the severity of the epidemic, as measured by total deaths. These decisions exacerbate the size of the recession caused by the epidemic.
The global economic shutdown triggered by COVID-19 has put the North American private debt industry to its first major test. What lessons can be learned from the global financial crisis that are relevant today? What lessons are emerging as a result of COVID-19? And how might the industry evolve?
The global economy is projected to contract sharply by –3 per cent in 2020, much worse than during the 2008–09 financial crisis. In a baseline scenario--which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound—the global economy is projected to grow by 5.8 percent in 2021 as economic activity normalises, helped by policy support. The risks for even more severe outcomes, however, are substantial.
The PRI is working with signatories to further develop thinking on what the COVID-19 crisis means for investors. It is establishing two signatory participation groups to coordinate and develop investor responses, focusing on short term responses, and a future economic recovery phase.
This OECD note provides illustrative estimates of the initial direct impact of shutdowns, based on an analysis of sectoral output and consumption patterns across countries and an assumption of common effects within each sector and spending category in all countries.
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