Private Special Situations

As described in earlier learning modules, private market strategies usually involve investments over a broad range of company life-cycle phases or project development stages with relatively long and illiquid holding periods. Private investment general partners (GPs) focus on adding value and generating returns over a multiyear investment life cycle in private equity, real estate, and infrastructure investments, among others.

Special situations investments, in contrast, are often of a shorter-term nature, focused on opportunities associated with events or market conditions that are expected to have a significant impact on the absolute or relative value of an issuer’s private or public obligations. These events are most frequently associated with either financial dislocation or distress, although non-financial events such as fraud, litigation, or failed business combinations may be involved. This type of investment spans a wide range of corporate and sovereign issuers and investments, including private special situations funds, high-risk debt strategies within a private debt asset allocation, or as a separate category of opportunistic investments. Despite their investments in publicly traded securities in many cases, special situations funds are included here due to their predominantly private ownership structure. Given their episodic nature and limited scope, special situations represent a small but growing fraction of the overall private market universe. According to the alternative investment data provider Preqin, which includes such investments in its private debt category as either distressed debt or special situations and mezzanine debt, these strategies are expected to reach over USD1 trillion in global assets under management (AUM) by 2027, or just under half of all private debt investments under management.

This learning module builds on the foundation established in the Private Debt learning module in this pathway by first addressing the features of special situations investments. While the previous learning module highlighted the use of debt in private market strategies over a restructuring or project development life cycle, the focus here is on events that materially affect the value of an issuer’s debt or equity securities. For example, financial distress, or a high likelihood that promised loan or bond payments will not be made in full on time, and its resolution via restructuring, bankruptcy, or liquidation are among the most common events associated with this investment subcategory. We will address the characteristics of distressed debt, which arise due to both adverse macroeconomic conditions and company- and industry-specific factors, as well as financing alternatives for distressed issuers. Investment approaches associated with special situations include short-term trading strategies related to credit events or business combinations, more active strategies seeking to control a firm as it emerges from bankruptcy, and more complex transactions involving capital structure or convertible arbitrage. As with other private ma kets, specialized GP knowledge and experience are critical to success in sourcing, evaluating, and executing special situations inves ments, which often include an understanding of the bankruptcy process. Valuation approaches are often supported by scenario analysis given the material impact of alternative outcomes. The combination of returns dominated by short-term price changes and the potential for less correlation and idiosyncratic sources of return are important drivers of the unique role of special situations in a strategic asset allocation.