Hybrid Value Style Funds
What are some funds that invest in both credit and equity and offer the experience at an associate level (APO HVF, BX TO, GS HV) style?
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Bump
BTO is not a hybrid value fund, at least it wasn’t designed to be like HVF.
Ares SOF, Searchlight, Centerbridge comes to mind
Basically everyone has one… WP CS, Oaktree, Brookfield SI, KKR SI, HSP…
KKR’s Strategic Investments Group isn’t talked much. $6.5B of exclusive capital and did the Quick Quack deal recently.
Tbh these aren’t as sexy as they sound. They are essentially mezz financing groups that target low to mid teens IRR
that pretty much what MF PE does now too. Megafund Pe teams are regularly underwriting to 17% base case returns. The hybrid funds target 15-18% gross usually
The major difference between these groups and a mezz shop is they'll also underwrite the equity heavily since they are structuring in some type of significant convert/warrant component.
A lot of these funds also play in publics, Ares SOF, Searchlight, Centerbridge, Oaktree,... With a bunch also looking at distress.
Do you have any idea what the case study looks like for one of these funds? have one coming up
Yeah, have seen a few different formats.
(1) they will give you a public bond/loan, filings and offering memorandums, and will ask you to present company with credit highlights/risks/mitigants, capital structure (with attach/detach leverage multiples and LTVs, ideally at par and at creation), and why the credit is trading at the price it is (event driven, current trading, regulatory, etc). Ultimately, your goal is to either recommend purchasing the credit at current price (backed up by valuation analysis) and if not: why not, at what price would you invest and is there any other part in the cap stack that you see as more attractive from a relative value pov. This is typically for funds that have some (or all) public exposure, mainly stressed and distressed. In terms of modelling, expect to make a very basic P&L and CFS with some projections, and have a think about what drives revenue (e.g. Price x Volume) but keep it all very simple. Valuation is likely done on DCF / multiples, again keep it simple
(2) typical LBO test on a company with HY bonds or LevLoans, where the question is mainly would you purchase the company, and if not, is there a different part in cap stack more interesting. Difference with above is that you have to build LBO model, whereas in (1) no LBO is required. Typical for funds with a more private angle (like Apollo HVF)
(3) 1-2 weeks case study where you’re given a bond/loan and are asked to recommend something. Your build-up should be the same as in (1), although the difference is that you likely will have to back each credit highlight and risk with quantitative data. For example, if you’re saying the business model is resilient, you better be showing the LT revenue performance through-the-cycle for the company and other peers. For these, your model should be very detailed, bottoms-up and you should be able to talk about each driver of the business and back your assumptions with data. For example, saying that volume will increase by 2% because it did historically, is not good enough.
Apart from that, few things that can make you stand out
- be honest about your shortcomings in your case. For example, you can say that the data is showing you prices will increase above inflation, but that you don’t feel comfortable with that assumption and you would want to do more work on that
- Have a list with follow up DD
- Don’t bullshit around topics you have no answer to. For example, if the OM mainly talks about volume protections in the customer contracts, and they ask about pricing, it’s fine to say you don’t know, you checked the materials and would definitely want to do more DD on that
- quick mental bond maths is your friend. Actually, general quick mental math is a plus
happy to provide more details. Wrote this quick and dirty on mobile, so apologies for mistakes
Do you have any idea what the case study looks like for one of these funds? have one coming up
Bump, i seem to be interested because i want exposure to a broad set of asset classes, but also because special sits / hv sounds ”sexy”. Any idea on how to learn more about these strategies so that I have actual knowledge, rather than just finding them appealing?
Special Sits is basically just an amalgamation of other strategies out there - they are just very flexible pools of capital. Also there is no actual definition of what "Special Sits" is because it's just a miscellaneous bucket.
You can go on some of the Special Sits websites (Apollo HVF, Sixth Street, Blackstone) and read some case studies.
I personally think they can be very interesting seats and is probably the closest to being a "pure-play" investor in the classic sense (Buffett)
Many thanks. I especially agree on the last part
Curious to understand why you would consider it ‘pure-play’ investing, or at least close to?
Sixth Street has a bunch of strategies but I believe most of them are pretty silo’d with their own pools of capital, then there is a central pool of capital that invests across all of them.
Thoughts on Bain Cap Special Sits?
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