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Mikael: It is not that easy to say whether it is a narrowed or more expanded opportunity.
If you want to put it in terms of the crisis it, is very different and one needs to remember that this is predominantly a health crisis that we are living through and not a financial crisis.
When we were in the global financial crisis (GFC) that obviously started within the financial markets and this is an important distinction this time around where the impact on the real economy comes through the shutdowns and the impact on everyday life which is very different.
The central bank intervention has created a large dispersion between the have and have nots. By this I mean that the central banks, having been very active on the liquid side, buying corporate credit and supporting these markets have been able to help a lot of companies who otherwise would not have survived but just scraped by but now have been able to find financing and live through their funding.
"There has been a lot of market participants who
have exited the market."
Whereas, the smaller companies who aren’t able to access this finance, or, perhaps there are other complexities, have benefited much less from this and are in a very different situation.
Since the last GFC, the run up that we have seen from 2009 onwards, and the liquidity, quantitative easing and central bank support along with, to some extent, other types of stimulus have meant that the opportunities have been less clear cut.
There has been a lot of market participants who have exited the market, either that or they have changed strategy, therefore in terms of the pools of capital directed towards rescue financing or special situation lending, this is now much less in terms of both capital and managers.
If you look at the current situation, the have nots are in a very different situation, they can’t access the liquid markets that are supported by the central banks and they are trying to find other types of lending solutions to help them get by in a scarcer universe both in terms of capital and managers.
Mikael: There has been a lot of commentary around this issue and the pandemic and the resulting shut down affecting these sectors and whether this in some ways just been an acceleration of a trend that was already ongoing.
One such example would be retail turning more to online and the death of malls etc. which has been in focus due to the pandemic and lock down but was already happening before.
You can’t generalise too much in terms of the themes or sectors that have now been hit and their subsequent long-term longevity.
I feel that one needs to dig down deeper in terms of the longer-term macro and micro economic trends supporting these sectors.
"You can’t generalise too much in terms of the themes or sectors
that have now been hit."
It does also vary, if we look at tourist travel, this has been something that, at least in Northern Europe, there has been quite a bit of focus on trying to travel less due to environmental concerns and this has been strengthening.
As people now are changing their habits and have more staycations, this is something that is likely to continue even though travel is likely to recover to some extent once people are able to travel again.
I do feel that there will be opportunities in this space because a lot of these companies have been red listed just by virtue of being in one of these sectors and companies are in strong need of cash.
They have been surviving due to many of the supporting measures such as the furlough schemes but there are opportunities to look at.
"The recovery will not be straightforward and so you need to focus
on the specific investment case."
That being said, at the same time you obviously have to keep in mind the longer-term trends so that you don’t end up backing something that is already on a trajectory of winding down based on other broader macroeconomic or structural trends.
It isn’t as easy as just picking certain sectors and structurally seeing where they are going. You need to focus on individual businesses and business models and determine which are the leaders within individual sectors or markets.
We will definitely see consolidation opportunities, and this is obviously an interesting opportunity set as the markets become more developed and have to look at the future in terms of their structure and growth potential.
Sector by sector and company by company, the recovery will not be straightforward and so you need to focus on the specific investment case to understand whether this is something that could benefit them and have a good recovery or whether it is something that is structurally challenged for a variety of reasons and is more likely not to be a viable investment case for the future.
Mikael: It depends on how the vaccine is rolled out and when people return to their normal lives, the euphoria that might occur in spending and making up for lost time.
It is very hard to gage in terms of when it would peak. It would probably peak that the pandemic is fully under control.
There is always lagging effects to this but right now there has not really been a boom phase opportunity set for distressed investing neither liquid nor illiquid.
"It is probably something that will play out over a longer period of time
in varying sectors and geographies."
There have been increasing opportunities, but it has not been a broad-based opportunity that a lot of people have been talking about or looking forward to.
It does remain to be seen and we are certainly not out of the woods yet and when the economic stimulus and as some of these support schemes need to be rolled back, then you will also see which companies are on a trajectory to be economically viable over the long term and which ones have been getting artificial aid and life support so that even in a recovery mode they wouldn’t be able to keep up.
From this perspective, we are not that confident that it will be a huge broad-based opportunity over a limited period, it is probably something that will play out over a longer period of time in varying sectors and geographies.
