The investment opportunities we will see as special situation investors will be bigger than anything we saw during the financial crisis in 2008/2009, according. Dr. Dirk Markus, Chief Executive Officer of Aurelius Equity Opportunities, a German investment company with a global presence that provides loans to distressed companies.
“North American value investors are already talking about this being a ‘once-in-a-lifetime’ investment opportunity, and I find it hard to disagree,” writes the CEO in an April letter to shareholders, titled Our business in the times of COVID-19- this glass is ¾ full.
The firm has appointed James Sharp as principal, from special situations and debt investor ESO Capital, where he was a director. He is expected to boost the firm’s investment capabilities, ahead of an anticipated rise in investment opportunities in the distressed market, according to news reports. Two other hires were also made to bolster complex deal experience in this unprecedented investment period.
In the period from April 14, 2020 up to and including April 17, 2020, a total of 47,650 shares were purchased under the share buyback program.
While strategy-driven special situations are a regular phenomenon, earnings and even more so liquidity-driven special situations are much rarer, says Markus.
“They typically occur only in times of severe market dislocation and create a special window for those brave enough to embrace the opportunity,” he says.
Markus admits that the firm is preparing for the likelihood that it will have to make difficult decisions for some of its portfolio companies, especially for those that were struggling already before the crisis hit. He provides some examples of those portfolio companies being tested in these tough times.
- CalumetWex having had to close its shops across Europe;
- Transform beauty hospitals in the UK being repurposed by the NHS to treat Covid-19 patients;
- HanseYachts having to slow down production due to missing parts;
- Office Depot seeing big corporate accounts lower their orders for office supplies as their employees are working from home
“Each and every loss of a portfolio company is unfortunate but, to a certain extent, part of private equity in general and special situations investing in particular,” he writes.
To shoulder some of the burden Aurelius’ management board has decided to reduce its total salaries for Q2 2020 by 25%.
On the flip side, Markus says some of the firm’s investments are actually “finding this Covid-19 crisis to have a positive impact on their business”.
Markus write, “While they obviously never hoped for this to happen, Conaxess in Scandinavia is selling record amounts of crisp bread and pasta and Idealworld TV shopping is seeing strong increases in TV viewing and sales in the UK.”
Aurelius Equity Opportunities currently has more than EUR 400m million in cash overall and more than EUR 200m thereof in non-operating (excess) cash.
In November, Aurelius Equity Opportunities AB, a subsidiary of Aurelius Equity Opportunities SE & Co. KGaA raised a placement of a 5-year EUR 75m senior unsecured bond. The bonds, maturing in November 2024, will carry a floating rate coupon of 3m Euribor + 4.25 percent, with interest paid quarterly. The proceeds from the transaction will be used for general corporate purposes, including investments and acquisitions of new portfolio companies and add-ons.
The Bonds will be governed by Swedish law. Pareto Securities advised Aurelius on the placement.
Aurelius typically maintains its stake for a period of 18 to 24 months, according to the company’s Bloomberg company profile.
More funding is flooding the market in preparation for anticipated deal flow.
Arbour Lane Capital Management, a private registered investment advisor focused primarily on opportunistic credit and special situation investments, closed at its hard cap of USD1.2bn of commitments, exceeding its initial target of USD750m on its Arbour Lane Credit Opportunity Fund II, L.P.
The Fund was oversubscribed and will focus secured bank loans in mid-size structures and out of favour investments at the top of the capital structure, primarily senior secured debt and/or other first lien securities.
International law firm Proskauer advised the fund manager on its fundraising. The Proskauer team was led by partner Monica Arora and included associates Alexia Boyarsky and Shummi Chowdhury (Private Funds), partner David Miller and associates Janicelynn Asamoto Park and Winnie Ma (Tax), and senior counsel Adam Scoll (ERISA).