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…
Want a higher yield with exposure to distressed private equity and can handle an erratic distribution payout? Invesco got the solution for you.
I’ve written in this newsletter before about the amount of dry powder in the private markets ready to be deployed. We’ll this is no different for the public markets too, leading to valuations that can be described as “frothy”.
Enter the Invesco Global Listed Private Equity Portfolio ETF, that has been designed to give yield hungry investors a chance to get exposure to private equity investments. The ETF will include such private equity tactics like buy/fix/sell (what I do), direct lending and distressed real estate. COVID driven lockdowns has lead to a spike in the number of deals completed in the space, meaning this ETF could show overperform similar to the post-2008 crash…
This fund, founded in 2006 & with $240M AUM, should find it’s moment in the sun given the current state of the market; frothy P/E ratios in public markets, little/no yields in debt markets and trillions in dry powder in the private markets. The fund isn’t cheap however, at a 1.6% fee, but the geographic diversity combined with a 4% yield do make the fund worth looking at.
Invesco sees that 4% yield to become a lot more attractive moving into 2022 & beyond, similar to how yields spiked after 2008 investments (see 2013) especially with central banks pumping liquidity into the markets.
COVID means you weren't able to go to a Chuck E. Cheese? We'll now they can come to you - a turnaround story
This nostalgic restaurant chain was a destination for me to attend many of my friends birthday parties when I was a kid. With an incredible amount of customer goodwill and over 600 stores, this restaurant chain should still have a long runway ahead of it (hard to put a price on a venue where tired parents can dump their kids off for a few hours & know they’ll be safe). However, $900M in debt and COVID shut downs lead this vaunted retailer to file for Chapter 11 & rethink it’s future.
Through the bankruptcy restructuring, CEC Entertainment solidified $200M in loans, lead by distressed debt firm Monarch Alternative Capital. This NYC private equity firm with around $7B AUM, specializes in distressed debt and bankrupt companies.
According to CEO, David McKillips, the company does plan to reopen all closed locations with a real push in the at-home dining experience, leveraging that customer goodwill that still exists with many consumers, including me.
Frozen pizzas, which often earn 12 feet sections in many grocery stores, have been a successful category for many retailers. Strong turnover and high AOV means grocers are always looking to expand the category. I think CEC is taking a page out of the cereal companies by adding a cartoon character to the box and appealing to the pre-teen market. Most options in the grocery store now are going upscale, trying to recreate a pizzeria experience as much as possible (& really not doing it very well IMHO). I like what CEC is doing here and at a $6.99 price point, grocers like Kroger have already taken note, awarding the product with valuable shelf space.
Selling nostalgia, especially into a $20B per year category could give Monarch Alternative Capital the cash flow needed to execute on it’s turnaround plans. Look to other struggling retailers to rethink their channel strategies and make a similar jump, especially if they can cross market the product with their stores. (buy a pizza at Kroger and get 10 free tickets at a Chuck E. Cheese store)
Private Equity, thirsty for deals, found a tasty one in the Washington State wine industry.
Ste. Michelle Wine Estates (SMWE), the largest winery in the Pacific Northwest and third-largest premium winery in the country, was sold to Sycamore Partners, a New York-based private equity firm. Sycamore, which specializes in retail and consumer investments, will purchase the company in the second half of this year from the current owner, tobacco giant Altria, for a cool $1.3 billion in cash.
Let’s face it Altria likely wasn’t giving the attention to this investment that a Sycamore can give it so I believe this is an “attention arbitrage” opportunity for them. Peter Lynch, one of the most successful fund Wall Street fund managers of all time, loved the concept of a corporate “spin off” —> pulling an underperforming business unit out of a major conglomerate and allow it to shine on it’s own. I see this as a similar type of transaction, just in the private markets.
The Washington State wine market has rode a tidal wave, going from 200 wineries in 1999 to 1000 in 2021. However, overall production has declined by 1.2 million cases leading to significant inventory write-offs by Altria. Unable to move bottles, combined with a lack of direct to consumer investment (which isn’t Altria’s strength), created a great opportunity for Sycamore to take this money loser off their hands. Add to the fact that SMWE no longer has the stigma of being owned by a tobacco company could create new tailwinds that Sycamore needs to earn a strong ROI.