“Large Scale Bottom Feeding”

Ashby Monk

‘Bottom feeding’ might not jump out at you as a lucrative endeavor. But in the game of finance, it most certainly is – there are opportunities aplenty to profit from others’ mistakes, misfortunes and miscalculations. Take as an example the LBO industry in the ’80s and ’90s, which was basically founded on the principle that struggling firms could be reorganized (and dismantled) to create new efficiencies (and profits). Anyway, opportunistic plays in distressed assets can be quite compelling, especially for investors that can take a longer-term approach to the turnaround. And, in my opinion, this is why SWFs are well positioned to tap into this segment of the market.

Granted, this isn’t really ‘news’. I’ve been talking about the potential boon to SWFs from distressed assets for some time. Indeed, back in February, I blogged about a $10 million investment by Temasek in a firm called SecondMarket, which is a market maker and broker for  these types of illiquid assets. Basically, this small firm exists to facilitate the trade of LP interests, CDOs, MBS, and even private corporate stock among other things. I think there’s a bright future there, but some SWFs are also pursuing distressed assets directly from the distressed. For example, there was the widely reported offer the CIC made for a portfolio of assets at Stanford University back in late 2009. And, quite recently, the Chinese SWF apparently made a bid for Harvard University’s real estate portfolio:

“China Investment Corp., or CIC, recently approached the University’s money managers about a possible purchase of Harvard’s positions in six real estate funds.”

The folks over at Z-Ben (who passed along their latest research report on the CIC) have a nice way of characterizing the Harvard bid by the CIC:

“…we think of it as an instructive example of one of CIC’s favored investment approaches: large-scale bottom-feeding…One of the few advantages of CIC’s size and liquidity is its unequalled ability to write a check on the spot. That advantage can sometimes best be exploited when facing a motivated seller, for whom the fast disposal of an illiquid asset may mean the difference between survival and bankruptcy.”

Obviously, I agree. And what’s interesting about the Z-Ben report is their prediction for the future:

“There likely aren’t many distressed sellers in the world with USD2bn+ portfolios out to bids. However, we won’t be surprised if CIC attempts to negotiate deals with all of them by the end of the year.”

Now, the real question here is why other SWFs aren’t using their deep pockets for these types of investments…

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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