It wasn’t meant to be this way. With the worst effects of the covid pandemic beginning to recede, this was supposed to be the period of economic recovery where companies that had demonstrated their resilience through that most challenging period could look forward to riding a growth wave. The dislocation funds that cropped up in early 2020 as covid chaos reached its peak would be fast becoming a distant memory – a one-off phenomenon, something of a flash in the pan.
And now they’re coming back. At least that’s what London-based fund manager AlbaCore Capital Group appears to hint at. In a reflection on current credit market conditions published this week, the firm’s founder and chief investment officer, David Allen, said: “Periods of adjustment in markets broaden opportunities, and the current environment is no different. We assumed a more attractive entry point would return – dislocations occur more often than one might assume – and here we are.”
Here we are indeed, in a world where we’re reminded that crises can follow on from one another with alarming rapidity. Of course, it’s a difficult thing to say out loud but the truth of the matter is that crises that may cause untold misery to human populations can also, as a by-product, catalyse the kind of volatility in financial markets that can be highly profitable. KKR showed just how profitable when revealing that its dislocation fund returned 52 percent in 2020. Anecdotal reports suggest other such funds also shot the lights out.
If a new generation of these vehicles is heading to market, they would do so with every expectation of raising capital successfully. Nonetheless, the decision to invest is not an easy one for LPs. As we highlighted when the 2020 vintage was raised, these funds demand capital be committed very quickly. The reasoning is solid enough, given that that the opportunity set may be fleeting. But many investors simply can’t get approval from investment committees with sufficient speed.
Another issue is transparency. One market source remarked to us that dislocation funds tend to “take your money and do what they like with it”. “Flexible mandate” is the official description, but however you describe it, it’s not especially see-through. Indeed, some say these funds act more like hedge funds than private debt funds. Returns may be a strong point – transparency isn’t.
Connected to the point about flexible investing is a related one about possible strategic drift. Dislocation has a tendency to straddle public and private markets and demands a strategic approach that can operate successfully in both arenas. Some organisations are able to readily demonstrate the expertise to do this, but for investors there will always be discomfort around the notion of GPs straying from their core specialisations.
A new opportunity may be springing up, but some old challenges still remain.
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