Värde Partners Co-CEOs Speak at Milken Global ConferenceNovember 3, 2020
MINNEAPOLIS and SINGAPORE – Värde Partners, a leading global alternative investment firm, today shares commentary by Co-Founder and Co-CEO George Hicks and Co-CEO and CIO Ilfryn Carstairs from the recent Milken Institute Global Conference. The conference was held virtually and centered on the theme “Meeting the Moment.”
George joined the “Common Sense in Uncommon Times” session to discuss the perceived disconnect between markets and the current economy. Ilfryn spoke on the “The Credit Recovery: Uneven, Unequal, Uncertain?” panel, offering his insight on the changing credit environment and the specific sectors and regions that offer opportunities.
Lessons From Past Cycles
Commenting on the early response to the crisis, George drew comparisons with past cycles. “We recognized very quickly that we had a substantial opportunity set in front of us. Historically, the opportunity starts in the public and more liquid markets,” he said, detailing how the firm initially focused on investment grade, fallen angel and other public market opportunities. “We know it is part of a process that is going to unfold over a few years. We have gone through the first six or seven months of it, but now we’re starting to shift to more private opportunities and ultimately there will be more of a distressed cycle.”
George reflected on the firm’s ability to pivot to markets and geographies where it saw the best relative value in the early stages of the pandemic, driven by the depth of public markets and the different levels of government intervention across the world. “Even though we have the capability to invest equally in all geographies, what we’ve seen is that most of the opportunity set for us has been in the United States, 60-70% of it because those are where the large public markets are. Then it’s followed by Europe, where it’s a bank debt market not a bond market and the price adjustment is slower and the transacting is a bit slower,” George said. “Asia is a little different case, with much smaller public markets, and we are starting to see a growing pipeline on the private side.”
A ‘K-Shaped’ Recovery
“In many ways the recovery has been surprising, but on the other hand there is a material disconnect between economic fundamentals and how the market is responding,” George said noting that significant levels of monetary and fiscal stimulus appear to be masking substantial dispersion in credit markets.
“The reality is we have a K-shaped recovery, where while you can try to make a bullish case for next year, there are clearly Covid-impacted industries that are going to continue to suffer,” George said about the economic outlook. “An interesting case in point is commercial real estate. Sectors like industrials or multifamily are doing very well. But others, including hospitality, office and retail, which face more of a secular problem, are in trouble. Even when you have a recovery of some sort, as we get into next year and beyond, you have the secular challenge – how much office space you are going to need, what’s going to happen to business travel, and the like.”
Point in the Cycle
Reflecting on the current phase of the credit cycle, Ilfryn noted: “We’ve come through the chaos period at the beginning of this cycle but we are really still in the early to mid-part of the cycle, and that makes us ask not only what opportunity is out there, but what type of risks do we want to take. There’s a happy confluence at this point in credit markets, where there’s a lot of demand for credit, be that for bolstering liquidity, problem solving, rescue capital or even deleveraging capital.”
“It’s a point in time where you don’t need to take on so much uncertainty,” Ilfryn said emphasizing the ability to be selective given the large demand for credit. “We’re still very focused on things that have great downside protection that aren’t precisely dependent on the path of the economy. The end of the health crisis and the end of the credit crisis will be very different, depending on the industry concerned, because so much damage has already been done. We expect the credit opportunity to extend well beyond the point we have a health solution.”
Significant Value in Dislocated Markets
Discussing the prevailing opportunity set, Ilfryn commented: “There is still a lot of value in traded credit markets, both in corporate credit and certain areas of structured products, where we continue to see significant dislocation. There are opportunities to buy the securities of very large companies, with strong business models and access to liquidity, at good duration with significantly wider spreads. In certain circumstances you can find those dislocations even where equity market cap and enterprise values have almost fully recovered.”
Across private credit markets, Ilfryn outlined certain potential compelling opportunities across asset based lending, pointing to the firm’s scale in commercial real estate debt, corporate lending, consumer finance, and more bespoke special situations origination, particularly in Asia.
Expanding on the drivers for lending opportunities in Asia, he said: “There is a systematic supply-demand imbalance for credit in Asia. It’s very poorly supplied, particularly when you compare it to the size of the traditional financing markets in the U.S. and Europe, and you haven’t seen the same depth of development of the alternative credit market. It is also a region with an enormous demand for credit, either through growth or the fact that there are very credit dependent industries such as real estate and heavy industry. So any time there is disruption in the market we tend to see a real elevation in the pricing for credit in our Asian origination business.”
About Värde Partners
Värde Partners is a leading global alternative investment firm with roots in credit and distressed. Founded in 1993, the firm has invested more than $75 billion since inception and manages over $14 billion on behalf of a global investor base. The firm’s investments span corporate and traded credit, real estate and mortgages, private equity and direct lending. Värde employs more than 300 professionals worldwide with offices in Minneapolis, New York, London, Singapore and other cities in Asia and Europe. For more information, please visit www.varde.com.