Opportunity Unfolding in Europe:
One advantage of managing a portfolio of multiple hedge funds is that it gives us insight into the thinking of some smart investors as we spend a lot of time talking to a lot of different hedge fund managers. From time to time, we see an interesting consensus build around a particular investment theme or opportunity. When these situations begin to unfold, we tend to devote some extra research, time and energy to understand and evaluate these opportunity sets. We learn as much as possible about the positive impacts on the portfolio and any additional risks that these trades might entail. There have been a few instances over the years where a number of managers have become active in an area that we feel particularly excited about. Usually these situations have unique return and risk characteristics that we believe could be very additive to a portfolio. Today, we see a very strong thematic consensus building in the European bank restructuring space. The team at Infinity believes the investment opportunities in Southern European bank restructuring, including both non-performing loans (NPL’s) and non-core assets (NCA’s), is extremely timely, particularly given the amount of interest building from some of the leading credit fund managers in the space. For many, this is now one of their highest conviction investment themes looking out over the next twelve months.
Similar to Our Experience in the US:
In 2008 – 2009, the banking system in the Unites States was under extreme pressure due to the level of bad loans on the banks’ balance sheets caused by the recession and the sharp drop in the real estate market. When the banking regulators required the banks to dispose of these assets, a number of sophisticated credit fund managers stepped in to buy these loans at extremely attractive prices. This resulted in outsized returns compared to the associated risk these managers took in buying these portfolios. Many of our managers participated in this opportunity, and we have a number of clients that realized significant returns investing in the bank restructuring through a number of funds and structures.
After the US bank restructuring, our managers and many other investors turned their attention to the massive banking market in Europe. Europe’s banking regulators and governments began to encourage the European banks to dispose of their non-performing assets and this drove the banks there to begin their restructuring process. Many believed it was setting up to be a repeat of the same opportunity that just took place in the US. It took longer to develop, and up until recently was focused primarily on the Northern European countries. As expected, some of the larger credit funds stepped in to buy these non-core assets (NCA’s) from the Northern European banks. The managers that were able to take advantage of the situation in Northern Europe were able to purchase assets at very attractive prices, and this has resulted in outsized returns compared to the associated risks.
Now the opportunity has moved to Southern Europe, where the regulators are requiring the banks to dispose of their NPL’s and NCA’s, and, once again, we are seeing the credit funds stepping in to buy these non-performing assets from the banks. We believe investors have another opportunity to capitalize on various trades in the NPL and NCA market now opened up by the banking regulators and governments in Europe.
How to take advantage:
Infinity has dedicated a lot of time and resources this past year researching the Southern European bank restructuring opportunity along with researching who the sophisticated credit managers are in the space. We have concluded that this is one of the highest return/risk opportunities globally for investors. Targeted returns of mid-teens, with attractively priced portfolios of loan value vs. collateral value look very attractive to us; particularly compared to the global volatility of other asset classes.
Over the years, Infinity’s clients have asked us to be on the lookout for these types of high conviction opportunities, especially when there is consensus momentum building around them. As such, we are extremely excited to announce that Infinity has partnered with one of our current fund managers to give our investors access to the Southern European bank restructuring opportunity.
Given the conviction around the opportunity and the investment timelines, we are setting up calls with investors over the coming weeks to discuss in more detail and give specifics about how investors can take advantage of investing with Infinity and our partner fund manager.
We would be happy to schedule a call and welcome questions or comments.