why invest in distressed now?
WHY INVEST IN DISTRESSED NOW?
Private equity commitments are not invested in one lump sum but rather deployed over 4-5 year investment periods, making it impossible to predict the predominant investment environment for a given fund or strategy. This underscores the need to build diversified private allocations across strategies and vintages to achieve optimal results. Waiting for a broad market shift before allocating to distressed ignores the fact that the best opportunities are often fleeting, and that pockets of distress exist in every market. Distressed managers accelerate their investment pace during downturns, so if investors believe a correction is likely in the next 12-24 months, now may be a very good time to commit to a top tier manager.
Record levels of low-grade debt • $97 billion in high yield bonds were issued in Q1 2017 compared to $51 billion in Q1 2016, on top of record amounts of “junk” issuance since the financial crisis1 • There are now about $2 trillion worth of US dollar, non-investment grade bonds outstanding2 • The covenant-lite share of the S&P/LSTA Leveraged Loan Index now stands at over 70%, the highest level on record
FIGURE 1
FIGURE 2
COV-LITE SHARE OF US MARKET
U.S. $ HIGH YIELD MARKET SIZE 1977
$2,000B 1562
1666
1429
$1,500B
1229 1289 1111
$1,000B
80%
1808
962 944 900 892 942 946
70% 60% 50% 40% 30% 20%
$500B
10%
06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16
20
04
05 20
20
03
0% 20
0
Source: “Credit Strategy Weekly Update,” J.P. Morgan North American High
2006 2008 2010
2011
2011
2012
2014
2015
2016
2016
2017
Source: S&P/LSTA Leveraged Loan Index. As of April 30, 2017.
Yield Research, January 6, 2017.
iCapital Network
441 Lexington Avenue New York, NY 10017
212 994 7400
[email protected]
www.icapitalnetwork.com
WHY INVEST IN DISTRESSED NOW? 2
Interest rates are widely expected to go up • With inflation close to the Fed’s 2% objective and the economy at full employment, the Fed will need to keep raising interest rates or risk overheating the economy3 • According to Fed Chair Janet Yellen, the FOMC’s baseline forecast of two additional rate increases this year and three more in 2018 is not conditioned on expectations for fiscal stimulus4 • Rising rates will put pressure on a large universe of weak corporate borrowers FIGURE 3
FEDERAL RESERVE BENCHMARK INTEREST RATE
8% 7% 6% 5% 4% 3% 2% 1% 0% 1991
1995
2000
2005
2010
2015
2017
Source: Federal Reserve, March 15, 2017.
FIGURE 4
RETAIL BANKRUPTCIES HIT RECORD PACE IN Q1 OF 2017 Cyclical Distress
45
• While energy has been a hot spot for distressed investors in recent years, the retail sector is now facing significant distress driven by changes in distribution models and consumer behavior
40
• Retail bankruptcies have hit a record pace this year, with 14 chains announcing they would seek court protection as of April 6, 20175
25
35 30
20 As of April 6
15 10 5 0 2010
2011
2012
2013
2014
2015
2016
YTD
Source: S&P Capital IQ/Bloomberg.
END NOTES 1.
https://www.ftportfolios.com/commentary/insights/2017/4/11/senior-loan-high-yield-review---1st-quarter-2017
2. Acciavatti, Peter, Tony Linares, Nelson Jantzen, CFA, Rahul Sharma, and Chuanxin Li. “Credit Strategy Weekly Update,” J.P. Morgan North American High Yield Research, January 6, 2017 3. Guggenheim Second Quarter 2017 Fixed Income Outlook 4. Guggenheim Second Quarter 2017 Fixed Income Outlook 5. https://www.bloomberg.com/news/articles/2017-04-24/retailers-are-going-bankrupt-at-a-record-pace
iCapital Network
441 Lexington Avenue New York, NY 10017
212 994 7400
[email protected]
www.icapitalnetwork.com
WHY INVEST IN DISTRESSED NOW? 3
IMPORTANT INFORMATION These materials are for informational purposes only and are not intended as, and may not be relied on in any manner as legal, tax or investment advice, a recommendation, or as an offer to sell, a solicitation of an offer to purchase or a recommendation of any interest in any fund or security described herein. Any such offer or solicitation shall be made only pursuant to the final confidential offering documents which will contain information about each fund’s investment objectives and terms and conditions of an investment and may also describe certain risks and tax information related to an investment therein. This material does not take into account the particular investment objectives, restrictions, or financial, legal or tax situation of any specific investor. Past performance is not indicative of future results. Products offered by iCapital are typically private placements that are sold only to qualified clients of iCapital through transactions that are exempt from registration under the Securities Act of 1933 pursuant to Rule 506(b) of Regulation D promulgated thereunder (“Private Placements”). An investment in any product issued pursuant to a Private Placement, such as the funds described, entails a high degree of risk and no assurance can be given that any alternative investment fund’s investment objectives will be achieved or that investors will receive a return of their capital. Further, such investments are not subject to the same levels of regulatory scrutiny as publicly listed investments, and as a result, investors may have access to significantly less information than they can access with respect to publicly listed investments. Prospective investors should also note that investments in the products described involve long lock-ups and do not provide investors with liquidity. Private placements have important differences from publicly traded securities and this material does not intend to provide a full comparison of the risks and benefits of any asset class. The information contained herein is subject to change and is also incomplete. This industry information and its importance is an opinion only and should not be relied upon as the only important information available. Information contained herein has been obtained from third party sources believed to be reliable, but not guaranteed. iCapital takes no responsibility for the accuracy of the third party information. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Securities may be offered through iCapital Securities, LLC, a registered broker dealer, member of FINRA and SIPC and subsidiary of Institutional Capital Network, Inc (d/b/a iCapital Network). iCapital Advisors, LLC, an SEC registered investment advisor and subsidiary of iCapital Network, may be the general partner or investment advisor of some iCapital offered funds. These registrations and memberships in no way imply that the SEC, FINRA or SIPC have endorsed the entities, products or services discussed herein. Additional information is available upon request. © 2017, Institutional Capital Network, Inc. All rights reserved.
iCapital Network
441 Lexington Avenue New York, NY 10017
212 994 7400
[email protected]
www.icapitalnetwork.com
Private equity commitments are not invested in one lump sum but rather deployed over 4-5 year investment periods, making it impossible to predict the predominant investment environment for a given fund or strategy. This underscores the need to build diversified private allocations across strategies and vintages to achieve optimal results. Waiting for a broad market shift before allocating to distressed ignores the fact that the best opportunities are often fleeting, and that pockets of distress exist in every market. Distressed managers accelerate their investment pace during downturns, so if investors believe a correction is likely in the next 12-24 months, now may be a very good time to commit to a top tier manager.
Record levels of low-grade debt • $97 billion in high yield bonds were issued in Q1 2017 compared to $51 billion in Q1 2016, on top of record amounts of “junk” issuance since the financial crisis1 • There are now about $2 trillion worth of US dollar, non-investment grade bonds outstanding2 • The covenant-lite share of the S&P/LSTA Leveraged Loan Index now stands at over 70%, the highest level on record
FIGURE 1
FIGURE 2
COV-LITE SHARE OF US MARKET
U.S. $ HIGH YIELD MARKET SIZE 1977
$2,000B 1562
1666
1429
$1,500B
1229 1289 1111
$1,000B
80%
1808
962 944 900 892 942 946
70% 60% 50% 40% 30% 20%
$500B
10%
06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16
20
04
05 20
20
03
0% 20
0
Source: “Credit Strategy Weekly Update,” J.P. Morgan North American High
2006 2008 2010
2011
2011
2012
2014
2015
2016
2016
2017
Source: S&P/LSTA Leveraged Loan Index. As of April 30, 2017.
Yield Research, January 6, 2017.
iCapital Network
441 Lexington Avenue New York, NY 10017
212 994 7400
[email protected]
www.icapitalnetwork.com
WHY INVEST IN DISTRESSED NOW? 2
Interest rates are widely expected to go up • With inflation close to the Fed’s 2% objective and the economy at full employment, the Fed will need to keep raising interest rates or risk overheating the economy3 • According to Fed Chair Janet Yellen, the FOMC’s baseline forecast of two additional rate increases this year and three more in 2018 is not conditioned on expectations for fiscal stimulus4 • Rising rates will put pressure on a large universe of weak corporate borrowers FIGURE 3
FEDERAL RESERVE BENCHMARK INTEREST RATE
8% 7% 6% 5% 4% 3% 2% 1% 0% 1991
1995
2000
2005
2010
2015
2017
Source: Federal Reserve, March 15, 2017.
FIGURE 4
RETAIL BANKRUPTCIES HIT RECORD PACE IN Q1 OF 2017 Cyclical Distress
45
• While energy has been a hot spot for distressed investors in recent years, the retail sector is now facing significant distress driven by changes in distribution models and consumer behavior
40
• Retail bankruptcies have hit a record pace this year, with 14 chains announcing they would seek court protection as of April 6, 20175
25
35 30
20 As of April 6
15 10 5 0 2010
2011
2012
2013
2014
2015
2016
YTD
Source: S&P Capital IQ/Bloomberg.
END NOTES 1.
https://www.ftportfolios.com/commentary/insights/2017/4/11/senior-loan-high-yield-review---1st-quarter-2017
2. Acciavatti, Peter, Tony Linares, Nelson Jantzen, CFA, Rahul Sharma, and Chuanxin Li. “Credit Strategy Weekly Update,” J.P. Morgan North American High Yield Research, January 6, 2017 3. Guggenheim Second Quarter 2017 Fixed Income Outlook 4. Guggenheim Second Quarter 2017 Fixed Income Outlook 5. https://www.bloomberg.com/news/articles/2017-04-24/retailers-are-going-bankrupt-at-a-record-pace
iCapital Network
441 Lexington Avenue New York, NY 10017
212 994 7400
[email protected]
www.icapitalnetwork.com
WHY INVEST IN DISTRESSED NOW? 3
IMPORTANT INFORMATION These materials are for informational purposes only and are not intended as, and may not be relied on in any manner as legal, tax or investment advice, a recommendation, or as an offer to sell, a solicitation of an offer to purchase or a recommendation of any interest in any fund or security described herein. Any such offer or solicitation shall be made only pursuant to the final confidential offering documents which will contain information about each fund’s investment objectives and terms and conditions of an investment and may also describe certain risks and tax information related to an investment therein. This material does not take into account the particular investment objectives, restrictions, or financial, legal or tax situation of any specific investor. Past performance is not indicative of future results. Products offered by iCapital are typically private placements that are sold only to qualified clients of iCapital through transactions that are exempt from registration under the Securities Act of 1933 pursuant to Rule 506(b) of Regulation D promulgated thereunder (“Private Placements”). An investment in any product issued pursuant to a Private Placement, such as the funds described, entails a high degree of risk and no assurance can be given that any alternative investment fund’s investment objectives will be achieved or that investors will receive a return of their capital. Further, such investments are not subject to the same levels of regulatory scrutiny as publicly listed investments, and as a result, investors may have access to significantly less information than they can access with respect to publicly listed investments. Prospective investors should also note that investments in the products described involve long lock-ups and do not provide investors with liquidity. Private placements have important differences from publicly traded securities and this material does not intend to provide a full comparison of the risks and benefits of any asset class. The information contained herein is subject to change and is also incomplete. This industry information and its importance is an opinion only and should not be relied upon as the only important information available. Information contained herein has been obtained from third party sources believed to be reliable, but not guaranteed. iCapital takes no responsibility for the accuracy of the third party information. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Securities may be offered through iCapital Securities, LLC, a registered broker dealer, member of FINRA and SIPC and subsidiary of Institutional Capital Network, Inc (d/b/a iCapital Network). iCapital Advisors, LLC, an SEC registered investment advisor and subsidiary of iCapital Network, may be the general partner or investment advisor of some iCapital offered funds. These registrations and memberships in no way imply that the SEC, FINRA or SIPC have endorsed the entities, products or services discussed herein. Additional information is available upon request. © 2017, Institutional Capital Network, Inc. All rights reserved.
iCapital Network
441 Lexington Avenue New York, NY 10017
212 994 7400
[email protected]
www.icapitalnetwork.com
