1. How are you navigating the high-priced environment?
Over the last few years as credit prices have been high, equity prices have been high, we wanted to build a portfolio that focuses on much more nichey, uncorrelated cash-flow investments not dependent on the broader public markets for entry or exit.
When the markets experience spurts of volatility like earlier this year, we use that as an opportunity to buy additional assets, particularly on the debt side. We want to be tactical, to move into areas with specific dislocations. There is so much liquidity in the system, trillions of dollars, generated by global monetary policies and quantitative-easing programs. Of course that will inflate prices. But that works on the opposite side [as well]: There is so much liquidity and leverage in the system. When spurts of uncertainty and some negative events happen, that magnifies the effects and makes the pendulum swing much further than it otherwise would.
2. What are some examples of sellers under pressure?
Non-economically-driven sellers like banks at the end of the year closing down a division, or quarter-end portfolio cleanups. We bought great assets from European banks, Asian sellers, funds-of-funds that were liquidated, family offices that were under strain from a capital need. We always look for sellers motivated by other things other than purely price.
We bought something from an old defunct-bank-issued CDO closing down. The entity was $1.5 billion in size when it was created in the mid-2000s, and by now had wound down to about $20 million of remaining illiquid assets it had to move off its balance sheet. We extracted it at an attractive price. … It was a rounding error in a way for a previously $1.5 billion portfolio. Our $20 million produced a very good return.
3. You’ve been known for your work in credit and special situations. MB Global has moved into secondaries. What are you seeing in that market?
Our focus in secondaries is on our niche in credit, distressed and special-situations funds. We’ve been buying assets on the secondary market at discounts anywhere from 90 percent to 20 percent.
We look at either tail-end funds, end-of-life issues or restructuring, or hedge-fund side pockets. Our competitive edge is that we focus on this space that we know inside-out from our direct deal standpoint, both from assets in portfolios but also the managers.
These are assets we know well. … We have an extensive database of deals we’ve priced. Often what we do is buy a portfolio of assets and identify key value drivers and add to those positions and become one of the top holders in the fund, and drive value that way.
4. Do you have to get your hands dirty in that sort of situation?
In one portfolio we bought, we took the largest position in that portfolio at an 85 percent discount and we identified that the manager was not doing a good job. A lot of investors in the fund were stuck since 2008 and have been unhappy. We spearheaded an effort to remove the manager and put in a replacement workout specialist. It’s much easier when you buy a position at a 50 percent or 80 percent discount to shake things up and try to find help or remove the manager when they’re not doing their job.
5. Do you anticipate a downturn just over the horizon?
Leverage is back, and there is psychological unease on behalf of investors. Central banks are going to keep up extremely cautious monetary policies. This very accommodative monetary policy will continue with some adjustments [globally,] which will give special situations and distressed strategies great opportunities to accumulate assets when volatility picks up — which it inevitably will — and generate great returns across the cycle.
Photo of Maria Boyazny courtesy of MB Global Partners