Opportunity out of adversity was a theme of the Absolute Returns Conference, with presenters touting great investments to be had today in everything from high-yield credit to private equity secondaries.
Frank Jordan, a partner at New York-based high yield debt manager GoldenTree Asset Management, realised how bad the credit crisis was while lunching with the chief executive of a household-name US bank a week before presenting at the Absolute Returns Conference.
“The man was not willing to give an advance rate on a high yield bond, and that’s never before happened in my career,” Jordan said. “Furthermore, he said his bank would no longer provide leverage to any hedge fund with under US$2 billion of assets, so that’s the new definition of illiquid in this environment.”
As banks act to reduce their balance sheets and tighten their lending standards, Jordan said the “base scenario” for default rates in corporate credit would be 6 per cent for the balance of 2008, blowing out to 12 per cent in 2009 and 8 per cent in 2010.
With judicious buying, Jordan said this environment offered credit investors the chance of “equity like” returns of 15-25 per cent unhedged over a two year period.
Meanwhile for Marleen Groen, the chief executive of Greenpark Capital, the next 18 to 36 months represented a “huge opportunity” for the private equity secondaries market. “Secondaries are counter-cyclical and we’re likely to see a good vintage year in 2008,” she told the conference, despite the fact the market was currently enduring its first ever major worldwide downturn.
The hunger for liquidity among primary private equity investors would lead to a significant increase in quality deal volume, Groen said, however price expectations would adjust slowly.