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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.
Two ex-central bankers, Randy Kroszner and Lucrezia Reichlin, said that central banks were doing everything they could to ensure markets continue to function. They said inflation was unlikely.
For some investors, plunging equity valuations in March were an opportunity to ‘get back in’ at reasonable prices. More recently the rapid recovery has been a cause to position conservatively once again.
FIS 2020 will discuss how the unprecedented government stimulus in response to the pandemic could affect investor returns and specific allocations. Areas of concern include a sharp rise in zombie companies kept afloat by government support.
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