Managers make the best of a bad situation
Fund managers buying distressed European assets tell David Walker why the gloomy business climate is a good environment for their investments.
Some of the most experienced distressed fund managers are opening portfolios to help European clients make money from these troubled times. Several new, nimble portfolios have been launched by seasoned investors such as Lee Robinson (Altana Wealth), Gina Germano (Goldbridge Capital Partners), Donald Pollard (Credit Value Partners) and Andrew Marshak (Credit Suisse Asset Management).
International law firm Shearman & Sterling recently calculated that distressed funds had about €200bn devoted to European ‘special situation’ strategies.
It said many of its US fund clients had “devoted an increasing amount of time and resources to distressed investment opportunities in the UK/Europe”.
RICHES OUT OF RUIN
Distressed managers say that buying opportunities will emerge from Europe’s unremittingly difficult business environment, and that stricter capital requirements will force Europe’s banks to offload ‘problem assets’. This is despite the European Central Bank’s (ECB) immensely popular three-year, 1% bank loan programme.
“[ECB President] Mario Draghi might delay banks’ distressed selling, but he cannot stop it forever,” said one manager, who estimates the ECB has postponed widespread bank selling for a couple of quarters.
But as more distressed funds emerged, allocators’ appetite has weakened. In a recent survey of hedge investor appetite by Credit Suisse, distressed only ranked 16th of 33 strategies.
Susanne Hellmann, managing director of ING Investment Management (Germany), says: “When meeting clients during the past few months, there is no interest in this strategy. Our clients only ask for long-only, risk reduction strategies.”
Is only mediocre demand justified? Or will allocators who focus elsewhere miss an opportunity? Lee Robinson, who invested in distressed for 18 years before launching Altana Wealth last year, says: “Having more defaults is the only conclusion you can draw from there being too many debts, and not enough assets.
The whole political model since World War II is about making and giving people promises that end up with economies running out of money. It’s a simple analysis, but anyone who thinks the problem can be solved without default is in ‘La-La Land’.”
Standard & Poor’s analysis is broadly supportive. Its 2012 outlook on European corporates notes: “Country risks will likely weigh on the credit fortunes of more domestic-oriented European companies, especially those with significant exposure to economies that are hardest hit by the sovereign debt crisis.
“Weaker, B-rated companies – even those in the BB cate- gory – with high country exposure to the periphery still to complete refinancing ahead of 2012-13 maturities could face particular difficulties in 2012. About 57% of the 167 credit estimates that have defaulted since the end of 2007 remain highly vulnerable to defaulting again.”