Loan Note: We assess the distressed opportunity; the perils of being a small business

With pressures building, we may be set for another wave of distress. Plus: why it's better to be a medium-sized firm than a small one and Golub makes a push into wealth management. Here's today's brief for our valued subscribers only.

They said it

“The West is trying to wean itself off Russian energy in the wake of the tragic war in Ukraine. We see this hurting growth and increasing inflation in the short term”

Taken from the latest Weekly Market Commentary from the BlackRock Investment Institute

First Look

We dive into distress

Distress is back. How many times has that been said? Of course, as we remind ourselves in the cover story of our April 2022 issue, there are many different shades of distressed investment. Among the more popular in recent times have been the likes of special situations, capital solutions and opportunistic credit. In the main, these strategies are based around the notion that some form of distress is permanent – but is to be found at the individual asset level.

The strategy that has been less popular in recent times is the large-scale, ‘pure’ distressed approach, which seeks to capitalise on extreme market volatility that can shake industries or even whole economies to their foundations. Limited partners have become sceptical of the ability of some of these funds to deploy capital on a consistent basis and to avoid large bets in certain sectors that end up exposing them to over-concentration risk.

But then along came a profoundly different set of circumstances. Firms given a liquidity lifebelt by government at the height of the covid pandemic had it taken away as inflation began to loom large – since further exacerbated by the conflict in Ukraine. Under this kind of pressure, is the large-scale distressed debt opportunity back at centre stage? In our cover story, you’ll find the answers of leading GPs, LPs, consultants and others to this question. See also our Data Snapshot below.

Better be the M in SME
Medium-sized businesses have emerged from the economic impacts of covid in much better shape than their smaller counterparts, demonstrating widely contrasting fortunes for companies that fall under the ‘SME’ heading.

Research from UK-based SME lender ThinCats found that mid-sized SMEs borrowed approximately double their normal amount during the pandemic, compared with six times their normal amount for smaller firms. But while net cash levels for the mid-sized firms increased by around 60 percent, for smaller companies it was just 5 percent.

These depleted cash levels for smaller businesses put them at greater risk of insolvency according to the research – although this is from insolvency levels currently at record lows, largely due to the impact of government support schemes during the pandemic. The report predicts that insolvencies for mid-sized SMEs will rise to pre-pandemic levels, but will rise significantly higher for smaller businesses.

“The SME sector is often seen as a homogenous group; however, these findings show big differences in the financial resilience of the mid-sized compared to small businesses,” said Ravi Anand, a managing director at ThinCats.

Data snapshot

Distressed waves. Distressed debt fundraising has been remarkably consistent over the past decade but PDI fundraising data reveals that interest in the strategy can spike suddenly in waves, as seen in 2017 and 2019. With many investors anticipating recessions would hit in 2017, fundraising for the strategy peaked, but several more years would pass before covid-19 would trigger a serious economic crisis. Fundraising for distressed debt also held up well during the height of the health crisis in 2020.


Fintech links up with Golub 
iCapital, a fintech platform for the asset and wealth management industries, has partnered with US-based mid-market lender Golub Capital to provide wealth managers on the iCapital platform with access to Golub’s private credit strategies.

Financial advisers will be offered Golub’s products alongside iCapital’s education, technology and investment administration capabilities. iCapital will also build a customised technology platform for Golub that will enable wealth managers and their high-net-worth clients to access additional Golub products on an end-to-end, fully automated platform.

“We look forward to working with iCapital and its network of experienced wealth advisers to deliver solutions designed to help their clients achieve their goals,” said David Golub, president of Golub Capital.

Rotondo joins CLO unit at MidOcean 
MidOcean Partners, a New York-based alternative asset manager specialising in alternative credit investments and mid-market private equity, has announced that Joseph Rotondo, a senior portfolio manager for Invesco’s global senior loan group, will be joining as senior portfolio manager for MidOcean Credit’s collateralised loan obligation business.

Rotondo will be responsible for portfolio management of the firm’s existing CLOs as well as new transactions MidOcean expects to issue as it continues to build out its CLO platform. He will also serve as a member of the firm’s investment committee. Based in New York, Rotondo will report to Dana Carey, chief investment officer of MidOcean Credit.

Siddall steps up at PwC UK advisory unit 
Richard Siddall is to lead the UK debt and capital advisory team at PwC, taking over from John Williams, who is retiring in June. Siddall has led the regional DCA practice for the last six years.

PwC’s DCA team helps businesses to identify and implement financing solutions that support key strategic objectives. It provides management teams and shareholders with independent advice on financing strategy to address a range of objectives, such as funding a growth agenda, how to get the best deal when resolving upcoming debt maturities, or accessing alternative sources of liquidity.

LP Watch

Institution: Employees Retirement System of Texas
Headquarters: Austin, US
AUM: $36.1 billion
Allocation to alternatives: 36.0%

Employees Retirement System of Texas has approved $75 million apiece to Benefit Street Partners Contingent Opportunities and Benefit Street Partners Special Situations Fund II, a spokesperson at the institution informed Private Debt Investor.

Benefit Street Partners is managing both funds; according to the SEC filings it is understood that both the distressed credit vehicles were launched last year. The target sizes are yet to be disclosed by the fund manager.

ERS Texas allocates 0.7 percent of its investment portfolio to private debt investment, under the target allocation of 1.0 percent.

Recent fund commitments approved by the $36.1 billion pension fund have predominantly targeted North American distressed lending and senior debt vehicles across Europe.

Today’s letter was prepared by Andy Thomson with John Bakie and Robin Blumenthal