Ex-Millennium Manager Starts Fund to Tap Rising DistressBy
‘Lessons of 2008 are increasingly relevant,’ Gedeon says
By one measure, leverage is worse than in runup to crisis: S&P
Former Millennium Management investor Georges Gedeon is dusting off an approach that spun double-digit returns at the peak of the financial crisis as he sets up a new fund.
London-based Antler Capital Partners, which he founded in December after leaving Izzy Englander’s famed hedge fund, will tap event-driven credit strategies to bet on or against companies that become stressed or targeted in takeovers.
“Given the almost indiscriminate rally in spreads and the fast rise in rates we have had so far, the lessons of the 2006-2008 period are increasingly relevant today,” Gedeon said. “Leverage levels in private-equity transactions have also generally been going up in the developed world.”
Ten years of easy-money policies have encouraged more companies to accumulate debt loads that could become unsustainable and trigger the next default cycle as credit conditions tighten, S&P Global Ratings warned this week. The cost to protect against losses on junk bonds rose Friday to its highest level since December 2016 as the rout in global equity spread to credit markets.
Gedeon is seeking to raise as much as $500 million for the fund that will offset positions in corporate credit (comprising about 70 percent of the fund) with shorts, or puts, on equity. It’s an approach that worked for him in 2008 as a senior investment manager at London-based GLG Partners Inc. when he amassed shorts on overleveraged companies.
Although S&P estimates that there are now more companies carrying debt loads in excess of five times earnings than in 2007, Gedeon admits there are key differences with the world now compared to the eve of the financial crisis.
Today investors fret the return of growth, higher rates and inflation that could erode returns, rather than a scenario where companies carrying unsustainable debt loads tip the global financial system into a recession.
“In 2008, it was easy for me to get short: I only saw bad news,” Gedeon said. “In 2018, valuations are high but economies globally are doing better, there’s plenty of liquidity, default rates are low. Earnings have been OK.”
While spreads on global high-yield debt widened 22 basis points this month to 339, they only retraced their narrowing in January, and remain well below their five-year average of 486, according to Bank of America Merrill Lynch index data.
But that doesn’t mean there aren’t plenty of opportunities to bet against companies with high debt loads, poor management, obsolete products, or all of the above.
South African furniture retailer Steinhoff International Holdings NV is struggling after reporting accounting irregularities in December. York, Pennsylvania-based Bon-Ton Stores Inc. filed for bankruptcy protection this week, the latest victim of slumping mall traffic and the rise of online shopping.
As markets convulsed this week, Gedeon only wishes he had put more cash to work buying equity puts on his bearish convictions.
“Vol has spiked up so equity puts are now expensive,” he said. “You always wish you had more of a good trade.”