Amid the wreckage in markets, credit asset manager Värde Partners is already investing.
“Our experience through crises of the past has taught us that there is no time to waste to put money to work — in the right way — early on,” according to George Hicks and Ilfryn Carstairs, co-CEOs, in a letter sent to clients on Wednesday. Hicks co-founded the firm in 1993 with Marcia Page, who is now executive chair.
The firm’s thesis is that the economy and markets are in the first of three phases. Right now, it’s a time of wholesale uncertainty and chaos. The co-CEOs explained that while they feel the current crisis will be as bad or even worse than the great financial crisis of 2008, they see an opportunity to achieve both good absolute returns for investors as well as downside protection — but only if managers act fast. Värde is evaluating high-quality credit right now that is both liquid and available at good prices.
“In our view, markets are dysfunctional, and prices in many places do not make sense, creating hugely compelling potential opportunities,” they wrote.
At the same time, the firm is being cautious on certain sectors, including long-term restructurings. “There remains too much uncertainty and inadequate downside protection in this phase of the cycle,” the co-CEOs wrote in the letter, which excerpted parts of a webcast held for investors.
Although counterintuitive, some of the hardest-hit parts of the credit markets have involved the soundest issuers and the most senior parts of the capital structure.
“These are often liquid blue chip companies with very large market caps, leaders in their sectors and, we believe, likely survivors of this cycle,” according to Hicks and Carstairs. They also stressed that the dislocation in markets has given investors the ability to hedge downside risk relatively cheaply.
“Ultimately, we are not preoccupied with trying to identify the bottom of the cycle while the backdrop is still highly uncertain. For now, there is an advantage to simply having cash on hand to transact with sellers who need liquidity,” reported Värde.
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Phase two will be marked by a return of liquidity to markets, according to Värde. At that point, investors will be able to think about longer-term survivors, particularly in the hardest-hit areas of the economy.
As the cycle worsens, Varde expects that companies will be forced to sell off assets. Although some rescue lending opportunities are already in the market, the firm is holding off.
“They are characterized by high levels of desperation and low quality collateral,” the managers wrote. “We believe those in need of cash will ultimately come to terms with prevailing levels of price and risk, and eventually begin offering up more high quality assets,” said the firm.
Värde said phase three, in its view, is the aftermath. It believes this phase could last for two to three years in the developed world and five to seven years in other markets. Opportunities will include non-performing loans and special situations lending, among other areas.
There is plenty of blame to go around for the current state of markets, the managers wrote.
“It’s a broken market in places, and it’s being exacerbated in part by ETFs, passive money and CLOs,” wrote Värde’s executives. “The growing mismatch between assets and liabilities is playing a big role – and all as the intermediaries and banks are no longer acting as a significant cushion and are themselves dealing with physical disruption.”
