Every week, I write on 3 interesting happenings from the world of distressed investing, in a short and digestible manner.
Here is what I found intriguing that I wanted to share…
PE Funds should have a robust ESG investment policy, as nearly 50% of LP's think it'll improve investment performance
ESG, which stands for Environmental, Social and (Corporate) Governance, looks beyond the traditional profit maximizing objective and positions an investment portfolio to address such issues like climate change or sustainability. The fact that so many LP investors think this is very important should be a “wake up call to anyone who thinks ESG is a nice to have” according to Coller Capital’s CIO, Jeremy Coller.
Accrual accounting does not book any externality onto a balance sheet, which is a flaw of traditional capital systems (think dumping waste into a public river; a company may not bear the full cost of that pollution). ESG investing takes a more holistic view of investing, with funds like Blackrock stating that ESG is “core to long term value creation”.
A 2020 ISS Governance study indeed link ESG to financial performance. A direct impact can be seen on employee health, satisfaction and productivity, along with heightened brand perception. A switch to cleaner energy sources are yet to lower P&L expenses but this is more than offset with higher revenues.
Putting the motivation aside, genuine or not, adopting an ESG investment strategy not only will attract more capital dollars into 2021 but yield greater results for LP’s.
Investing in distressed debt will offer excellent opportunities in sectors that weren't "fixed" through the COVID lockdowns
At this years FIS Digital 2021, SVP Global Founder Victor Khosla spoke on the debt market trends over the past 13 years. The COVID lockdowns didn’t wring out “all the excesses” of the market since 2008. Cheap government money allowed too many sectors to get a pass on the inevitable with other sectors, such as travel or leisure, needing to restructure. These other sectors that weren’t “fixed” present the best yield opportunities, according to Victor.
Look to companies operating in industries with bright futures and competitive advantages but bad capital structures. These are the opportunities for investors to grab cheap senior corporate debt, with yields in excess of 7-8% but make sure they will benefit from a cyclical bounce back so the balance sheets will naturally rebalance. Bad capital structures are high D/E or low FCCR that violate most US banking debt covenants.
SVP Global made significant investments, acquiring the debt of Washington Prime Group, an open air mall that where they expect to see growing traffic numbers as consumers continue to shun indoor shopping. Other areas of interest are packaging, building and telecoms.
Have a clear understanding of a countries bankruptcy codes when buying corporate debt, will give you a better risk profile for each senior debt investment. You’ll need to be clear on how assets are distributed to the capital stack should a liquidation occur.
Private Equity, chasing yield, are buying up suburban single family homes at an increasing rate. However, first time home buyers, don't get those pitchforks out just yet.
Private Equity looking to put dry powder to work & clear stated hurdle rates is no great insight, however one might take concern as billions of PE investments are flowing into an asset class they’ve never been before; single family suburban homes. Put this news into context - more & more first time home buyers are struggling to enter the market as single family homes are just not affordable for many anymore.
This news has put the Twitterverse into overdrive with conspiracy theories ranging from…
to….
There may be a few kernels of truth hidden in the conspiracy theories, however what is the real impact of PE on the single family home market? (please note I just chose these 2 at random, there we hundreds of blue check mark conspiracies from both left & right on this issue)
The data tells a different story that points the finger away from Wall Street. It’s really being driven by a 4MM US nationwide housing shortage that stems from high lumber prices, inability to bring more supply to the market (from both a labor shortage & government urban planning interventions) and low interest rates increasing demand.
Sure PE doesn’t have the best reputation with respect to the multifamily market as actors who manipulate price and will evict a single mother if they are late on payments but to cast blame on them for the current affordability crisis is wrong. In fact they can actually establish a floor for the market like they did in the 2010-13 for MFH.
Over the past 5 years, PE firms have been responsible for acquiring less than 1% of all single family homes in America, a tiny amount. About 20% of all homes sold went to investors (flippers, small landlords, 2nd homes) who aren’t using them for a primary residence so they move the market much more than institutions are at this point.
In fact, as a % of total sales, investor purchases have peaked & are declining from 29% seen in 2013. You sometimes need to look beyond the chatter on social media from accounts usually with a perspective that must appeal to their specific audience. It doesn’t match the data often.