“High-return environments offer opportunities for generous returns through purchases at low prices, and typically these can be earned with low risk.”
– Howard Marks
Market pricing dislocations can occur when you least expect and then disappear rapidly. The challenge is being prepared to best take advantage of these situations. Through our experience, we have learned that private market investments can offer some of the best opportunities during times of financial stress. We discussed the growing importance of private investments in the current environment in our March ClearPoint – “Thoughts on Private Equity Investing.”
During these times, a highly skilled private equity investor or talented hedge fund manager that has honed their strategies over various market cycles can pounce on mispriced assets and earn the generous returns that Howard Marks highlights in his quote above.
In our opinion, there are many advantages that illiquid alternative managers have:
- Ability to act nimbly
- Access to “off-market” investment opportunities not widely available
- Means to buy rapidly growing business at lower market valuations
- Limited investment constraints often imposed by rigid benchmarks
- Access to “smart money” patient investor base
- Not subject to daily mark-to-market; focus on long-term value creation
Seeking investment opportunities and favorable strategies with our clients is the last step in adhering to investment policy during volatile and uncertain markets. See the last 3 posts in this series to review the prior steps: Investment Policy, Basic Cash Needs, and Sticking with Investment Strategy.
Over the last several weeks, we have identified and committed client capital to specific boutique alternative investment managers that we are actively increasing exposures to best capitalize on these market disruptions.
These opportunities fall into three categories:
1. Boutique Credit Focused Private Hedged Strategies – Taking advantage of current dislocations in public credit markets in areas that include:
- Investment Grade bonds and loans that have traded at sharp discounts but have ample liquidity to avoid permanent impairment,
- Municipal bonds that have traded at the widest spread levels in years, and
- High Yield and Distressed opportunities which could have the potential to generate annualized returns of 25%+.
2. Private Debt Draw-Down Strategies – Taking advantage of current dislocations in lending and private credit markets. Specifically, these strategies are investing in firms which have experienced underwriting stressed companies and navigating the bankruptcy process. These managers are looking at opportunities in:
- Providing senior, secured credit to companies shut out from other traditional lending sources at premium rates, and
- Buying loans or other credit investments that are impaired as means to gain control.
3. Private Equity Niche Strategies – Providing new capital or buying out existing businesses. Specifically:
- Buyouts of secular growth businesses looking for growth capital,
- Providing liquidity to investors looking to recapitalize business, and
- Acquiring companies as part of a larger roll-up strategy.
Clearstead recently rolled out a platform we call ClearAccess. Through ClearAccess, our clients efficiently access some of these high-quality private managers and strategies that may not be available to broader investors. It has taken years to develop these relationships and gain access to these highly skilled private equity and hedge fund strategies. The last several weeks of market disruptions have provided opportunities that alternative managers can capitalize on and achieve risk-adjusted returns that could be higher than public markets.
Information provided in this article is general in nature, is provided for informational purposes only, and should not be construed as investment advice. These materials do not constitute an offer or recommendation to buy or sell securities. The views expressed by the author are based upon the data available at the time the article was written. Any such views are subject to change at any time based on market or other conditions. Clearstead disclaims any liability for any direct or incidental loss incurred by applying any of the information in this article. All investment decisions must be evaluated as to whether it is consistent with your investment objectives, risk tolerance, and financial situation. You should consult with an investment professional before making any investment decision.
Performance data shown represents past performance. Past performance is not indicative of future results. Current performance data may be lower or higher than the performance data presented.
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