U.K. Debt Fund Manager Talks Current Market Challenges & Opportunities
Private equity industry veteran tells us that “the best opportunities are in temporary market dislocations when good companies get dragged down with the general market movement.”
4 May 2020
As we all know, the COVID-19 pandemic has caused a tragic loss of life and has delivered a serious and unexpected blow to the financial and economic system. Businesses from all industries and sectors are feeling the pain of the economic meltdown, with many firms struggling to find liquidity to continue operations.
As a result of the health crisis and economic volatility, fund managers are reevaluating all aspects of their business, from fundraising and investment strategies to how they interact work with their teams and connect with clients. It’s a fast-moving situation with risk lurking at every corner.
I recently spoke with a U.K.-based debt fund manager to discuss how the outbreak has affected their firm’s 2020 playbook, plans to deploy dry powder and where the best opportunities in the market are right now.
Intralinks: What has been the biggest adjustment to your day-to-day since the pandemic began?
The team is used to working from the road or home so not a big impact on desk-based work, to be honest. The biggest change has been the lack of travel. Phone/video calls are not the same (at least for now for fundraising). It’s possible that existing investors in previous funds will re-up into a new fund. However, it’s unlikely that new investors will commit without a face-to-face meeting.
Are you using tech in a different way to communicate either internally or externally? If so, how?
Some of the work has moved to Microsoft Teams, Slack, etc., but most of it remains the same internally. Externally more reliance on Zoom/video and increased telephone communication with current investors. We are required to more frequently report to investors on investments and we are finding that video conferences are the most effective way to do so.
Where are you putting your dry powder to work? Has the plan changed at all?
Yes, the focus has moved from privately sourced special situations to public distressed debt. Rather than investing in longer-term, private special situations, we’re looking to the public markets to acquire quoted debt which we’ll then hold until the price rises again. In the meantime, they’ll get yield on the investments anyway.
What is your fundraising outlook for the next 12 months? Has your timing or willingness to go to market been influenced by the pandemic?
Not a major change. We were already planning to start fundraising in early Q2 – but now there is an additional focus on an initial close in May/early June. It’s very unlikely brand-new investors will invest in a new fund without a F2F meeting with the team.
What is your current outlook for buyside and sellside investment activity? On which side of the market do you expect to be more active?
Generally speaking, we are speeding up investments for more recent funds that are still in the investment period, and we are slowing down/halting disposals for older funds that are in the distribution period.
What are the biggest challenges that you see in the current market? The best opportunities?
The biggest challenges are the duration and – as yet unknown – the long-term impact of the crisis and the size and scope of government intervention. The best opportunities are in temporary market dislocations when good companies get dragged down with the general market movement. Second to that, traditional distressed for control plays will be attractive again. This type of strategy aims to take advantage of opportunities arising from the dislocation being seen in the credit markets during stressful market times. Distressed debt has been out favor in recent times; however, current market conditions make them interesting once more.