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After ‘Starvation’ Comes the Best Distressed Cycle in a Decade, Says Strategic Value Partners

After raising a $1.7 billion distressed fund, the asset manager is expanding its executive ranks.

After closing on a $1.7 billion distressed fund in four months, private equity and distressed firm Strategic Value Partners is deploying the money and expanding its team. 

The new hires include two former Hirtle Callaghan executives. Ranji Nagaswami, the outsourced investment management firm’s former CEO, is joining Strategic Value as chief strategy officer and chief commercial officer, overseeing the firm’s ESG committee and infrastructure, including people, systems, and technology. Nagaswami was previously the chief investment advisor to Mayor Michael Bloomberg and the City of New York.

In addition, Sarah Pillmore, former chief human resources officer at Hirtle Callaghan, will join the firm in early 2021 as head of human resources and talent. Both executives will work on diversity and inclusion and join Strategic Value’s 16-person management council.

Victor Khosla, the $9.8 billion firm’s founder and chief investment officer, said Nagaswami’s hiring was spurred by the firm doubling in size since 2016, as well as building direct sourcing capabilities and operational teams to fix companies that have gone into bankruptcy. Strategic Value Partners now holds majority equity positions in nine companies, with a combined 15,000 employees. 

Nagaswami will help continue to build out marketing and non-investment infrastructure as the firm has grown from 34 to 51 investment professionals and 120 people overall. The asset manager also wants to be ready to invest early in the distressed cycle, not later.

“SVP's record extends through cycles, and includes outperformance and gapping the competition in a five-to-seven year period when distressed investing was on its back,” Nagaswami said when asked why she took the job. “But this team has delivered.”

Nagaswami has served the Yale University investment committee and the UAW VEBA’s investment advisory council. She is now on the Curtis Institute investment committee. 

Strategic Value Partners, which also has dry powder in its restructuring fund and special situations fund, has invested about $2.8 billion over the last six months. Last week, Strategic Value took control of Omnimax, a building products company. Among other investments, the firm also invested in Swissport, an airport services company in Europe. 

“The recession has fired the starting gun on a big new distressed cycle,” Khosla said. “It’s a once in 10-year, once in 15-year opportunity in distressed. And it’s not just busted LBOs. It’s broader and with other asset classes like lodging and airplanes involved. It’s not trading oriented like ’09. Today, a large restructuring is $3 billion to $5 billion, rather than, say, the Lehman bankruptcy, and requires sourcing and operating skills to fix businesses. We’ve done well in the last 10 years, and even over the last five to seven years when the distressed opportunity has been more muted.”

Strategic Value sees its core opportunity in U.S. and European high-yield and leveraged loans. In addition, it’s eying investments in airplanes and hotels and lodging, but largely staying away from oil and gas assets. Khosla said big city hotels are less interesting than extended-stay properties, because of the decline in business travel.

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Khosla characterized the last five years in distressed as the “starvation years.” Although he declined to comment on performance, all four of the firm’s special situations funds are in the top quartile ranked by internal rate of return and multiple of invested capital, according to documents from Cambridge Associates.

“We’ve done well in the last 10 years, but in the last four to five years, it’s been a really tough business,” Khosla said. The firm has been investing in old economy businesses, such as power generation and taking control of toll roads through restructurings. “We’ve had a good crisis,” the CIO added. “None of our companies needed any money, no default situations, or even close.”

According to the Khosla, overall cash flows for companies backed by Strategic Value are up by more than 29 percent in 2020 compared to 2019.

“That means we weren’t worrying defensively,” Khosla added. “We were able to go on the offensive right off the bat.”

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