Conference Presentation, Panel
Treasure Hunters: Discovering Value in Volatile Markets
- Traditional auction processes currently capture approximately two-thirds of transactions, leaving a 20% to 30% segment of out-of-favor, stressed, or distressed businesses as the primary target for value-oriented private equity.
- The domestic energy sector is anticipated to undergo a seven-to-eight-year transformation similar to the internet revolution, driving opportunities in LNG, LPG, crude, and coal shipping as the U.S. approaches energy self-sufficiency around 2020.
- Significant investment potential is identified in ancillary industries such as REITs, infrastructure, and consumer services within states experiencing early-stage fracking, particularly in Texas, California, New York, West Virginia, and Utah.
- The credit market is viewed as being in the mid-to-late cycle with elevated risk, evidenced by increased triple C issuance, holdco deals, and acquisition financing, while the distressed universe currently focuses on middle-market companies with enterprise values below $2 billion.
- Future distressed opportunities are predicted if U.S. GDP growth stalls at 2.5% to 3% and 10-year yields reach 4%, potentially creating $50 billion in paper trading between 75 and 85 cents on the dollar.
- High volatility in interest rates, rather than a gradual tightening, is expected to be the primary catalyst for distressed opportunities, particularly given the $1.7 trillion in debt maturing between 2017 and 2020.
- Current valuations are supported by extraordinary monetary regimes and low interest rates, creating a risk of irrational price levels for private companies and public equities as cheap debt fuels leverage.
- A potential credit disruption involving earnings misses or central bank rate hikes in emerging markets like Turkey, Brazil, and South Africa could cause spread widening of up to 150 basis points and significant value loss in the high yield market.
- Structural risks exist in the economy where perceived growth is concentrated in consumer durables like housing and cars, while other sectors show muted growth, and investment grade debt markets are criticized for rapid deal execution at tight spreads.
- Investors are advised to prepare for market volatility by securing 10-year lockups, raising dedicated distressed capital with a four-year investment period, and positioning for high single-digit returns in non-agency mortgage markets.
- The outlook warns that the current reliance on monetary policy may eventually lead to an economic accident, necessitating a tightening of investment strategies as capital becomes nervous during periods of sudden volatility.