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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.
Investment opportunities in emerging markets include high yields on local government debt and cheap currencies, while China's Renminbi has proven its resilience and is now considered a safe asset currency according to chief economist at Pictet Asset Management, Patrick Zweifel.
The only solution to the problem of COVID-19 is a vaccination. Oxford University's Jenner Institute is one of the organization's racing to provide a vaccine, and it's director Adrian Hill believes the Institute could have cracked it by year-end.
Founder of SVPGlobal, Victor Khosla tells FIS 2020 delegates that although the opportunities in distressed debt are significant, investors should pick and choose. It's not like 2008.
Real estate is one of the asset classes hardest hit by the pandemic. Although FIS 2020 experts warn that some companies may never return to the office, opportunities are already appearing in smaller, regional hubs while listed real estate will recover quicker than private investments.
CEO of Franklin Templeton, Jenny Johnson, said asset managers need to do more, particularly in boosting diversity and inclusion in the underlying companies they own. She said the industry needed to do more to ensure capital is available to black-run and female-run businesses.
Current fiscal and monetary policies are taking the world down a necessary, but dangerous path, according to co-CIO of Bridgewater Greg Jensen. He told investors asset allocations should focus on diversification, and assets that benefit from fiscal and monetary policy moving together.
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