The Road Less Traveled: Investing in Special Situations

Global Investment Focus and Geographic Shifts

• Shift to Illiquidity: Liquid, large-cap distressed opportunities in the US and Europe have become "pretty thin," forcing investors to pivot toward illiquid assets, physical properties, and small-cap strategies.
• European Banking Deleveraging: Bain Capital Credit has been acquiring assets from European banks for five years; activity has shifted from Northern Europe to Southern Europe (particularly Spain), where nine portfolios are currently on the market.
• Asia-Pacific Expansion: Bain Capital Credit is targeting Asia-Pacific due to high leverage levels ("far more levered than even Europe"), a turning credit cycle, and significantly lower institutional competition ($22 billion raised in special situations vs. $209 billion in the US).
• Colonial Northstar Real Estate Focus: Colony Northstar derives roughly two-thirds of its business from real estate; the firm continues to focus 70-80% of its distressed credit efforts on the US despite a global crisis origin.
• MB Global Tactical Approach: MB Global Partners employs a "tactical" strategy, shifting between liquid/illiquid, single assets/asset pools, and control situations to exploit capital market inefficiencies, with a recent focus on smaller, niche opportunities.

Regional Analysis: Europe

• Supply vs. Risk Paradox: Maria Boiazni notes a favorable supply-demand dynamic (estimated €1.2 trillion in non-performing loans available) but warns that political and socioeconomic uncertainty regarding the future of the EU poses a significant exit risk.
• Margin of Safety Requirement: Bain Capital Credit typically purchases assets in Spain at 40-45% below fair market value to offset execution delays and duration risks associated with judicial enforcement processes.
• Currency Hedging: All Bain Capital funds are US dollar-based; principals invested in Europe are fully hedged back to the dollar, with underwriting models requiring companies to withstand expected currency depreciation.
• Investment Horizon: Colony Northstar views European private equity risk as a medium-term (5-7 year) hold but finds the 2-3 year horizon for distressed debt more aligned with their comfort levels, hoping European governments "kick the can" during that window.
• Creditor Rights Complexity: Justin Chang notes that creditor rights and legal idiosyncrasies in European jurisdictions (e.g., France, Italy) are more challenging than US markets, requiring higher bars for investment entry.

Regional Analysis: Asia and China

• Private Credit Saturation Turning: Jeff Robinson identifies a massive, historically unprecedented expansion of private credit in Asia that is now tightening, leading to rising non-performing loans (NPLs) and a natural end to the credit cycle.
• Market Immaturity Advantage: The Asian credit market is described as "far more like Europe in the early 2000s," with less well-banked companies and fewer direct lending channels, allowing investors to create structured securities with superior protections compared to the US.
• Chinese NPL Reality Check: Justin Chang and Maria Boiazni argue that while Chinese NPL data appears high, the Chinese government is highly effective at managing these internally without forced market write-downs, delaying the opening of a true distressed opportunity market.
• Execution Barriers: Challenges in Asia include a lack of servicing capability, difficulties in repatriating capital, and political constraints where the government will not permit banks to take significant losses.
• Transaction Activity: Despite the challenges, evidence of tangible transactions is increasing, with Asset Management Companies (AMCs) beginning to construct and sell portfolios, though the bid-ask spread clearance remains a key risk.

Liquidity, Deal Structures, and Capital Allocation

• Liquid Market Decline: Jeff Robinson states that liquid credit opportunities for MB Global have dropped to less than 10% of the business, with some assets trading at levels that are unattractive relative to risk.
• Primary vs. Secondary Shift: Colony Northstar reports that 80% of its real estate credit business is now direct loan originations, filling a massive gap left by banks pulling back from lending; liquid acquisitions represent almost nothing of their current portfolio.
• Distressed Debt Volume: Bain Capital Credit currently allocates approximately 50% of its portfolio to buying assets from banks, 30% to primary/bespoke capital injections, and 20% to liquid secondary trading.
• Direct Lending Substitution: Maria Boiazni notes that while MB Global provides direct solutions to bridge payment timing gaps (e.g., government receivables), returns in this space are shrinking as corporate borrowers can access cheaper bank asset-backed loans.
• Commodity Cycle Volatility: During the 2016 oil price crash, liquidity was available briefly for those prepared to buy, but the opportunity window closed rapidly as companies executed cost-cutting measures (20-25% reduction) faster than anticipated.

Sector-Specific Opportunities

• Media Sector Turmoil: The media industry is described as "unsettling" for the first time in 20 years due to streaming competition (Netflix) and changing advertising models; opportunities exist in small, idiosyncratic assets or roll-up strategies of smaller platforms.
• Retail Skepticism: Panelists express a strong consensus that retail is "terrible" for distressed investing due to secular declines, operational leverage, and the difficulty of shrinking concepts; MB Global finds opportunities only in discount retailers or by taking security over inventory.
• Digital Infrastructure Growth: Colony Northstar is expanding into digital infrastructure (data centers, fiber, cell towers), viewing these as hard assets with 15-30 year contracts to tech giants, offering downside protection and growth in the cloud computing sector.
• Logistics and E-commerce: Colony Northstar is active in "light industrial" and "last-mile" warehouse space, driven by e-commerce demand, which offers better risk-adjusted returns than traditional real estate.

Future Risks and Strategic Challenges

• Political Risk as Primary Threat: Justin Chang identifies the "too many people left behind" phenomenon (wealth gap, manufacturing loss) leading to political instability (Brexit, protectionism) as the most dangerous macro risk, potentially altering capital flows.
• Patience vs. Deployment Pressure: A primary challenge for all managers is maintaining discipline and patience in a market awash with liquidity; the hardest task for institutional investors is remaining invested without sacrificing returns while waiting for the next distress cycle.
• Protectionism Impact: While protectionism could disrupt trade flows, it is viewed by some as a potential source of new opportunities if companies adapt quickly; the greater fear is a retreat in foreign direct investment (FDI) into markets like Asia.
• Infrastructure Timing: Infrastructure spending in the US is expected to accelerate over the next 2-3 years, but progress depends heavily on the federal government reducing the ~10-year permitting process to ~2 years.
• Correlation Risk: Maria Boiazni warns that in times of stress, asset correlations will converge to one; the key challenge is structuring portfolios to maintain downside protection when "everybody's long some element of assets."
• Capital Flow Vulnerability: Jeff Robinson highlights the risk that if countries like China restrict foreign capital access, it will limit the ability of international funds to deploy capital into distressed opportunities where they are most needed.