Thursday, 23 March 2017
Last updated 16 min ago
Oct 9 2013 | 5:52am ET
The Bowery Opportunity Strategy, which began life in 2009 as the Longacre Opportunity Strategy, focuses on niche special situation credit opportunities and does so successfully: the strategy has generated annualized returns of 21% since inception.
The man behind the strategy, Vladimir Jelisavcic, was a founding partner at Longacre Fund Management where he worked for 12 years before founding Bowery Investment Management in 2012.
Bowery's approach, Jelisavcic told FINalternatives in a recent phone interview, is similar to that of other special situations funds except when it comes to the scale of opportunities it targets. Rather than focusing on “the largest mega-cases, many of which have rolled off the radar screen and gone through their lifecycles and made distributions to creditors”—cases like Lehman and TXU—Bowery focuses on “much more targeted, niche, smaller-scale opportunities...with a special emphasis on trade claims.”
Then And Now
When it launched in 2009, the Longacre Opportunity Strategy was a throwback to “what made the Longacre firm great in the first place,” said Jelisavcic, “that focus on overlooked, middle market and trade claim opportunities, both in stressed companies as well as distressed companies many of which were (and in terms of our current portfolio, are) in Chapter 11.”
That it launched in 2009 is no coincidence: 2009 was a recession year and of all the forces that conspire to create distressed debt—interest rates, regulatory changes, changes in competitive dynamics—recession, said Jelisavcic, is the most significant.
As well as being a time of abundant distressed debt supply, the 2009-2011 period was also a time of abundant competition. Today, much of that capital has circulated away from distressed debt opportunities.
“The top 10-12 distressed funds manage a much higher percentage of overall distressed assets than ever before and the challenge for investors, particularly late in the distressed cycle as we are now, is that very large funds tend to invest in many of the same cases, so there's a real lack of diversification between most of our very larges competitors,” said Jelisavcic.
Bowery, on the other hand, has a “unique” portfolio, he said, thanks to its focus on opportunities larger managers tend to shy away from:
“We're always looking for an edge and edges come in different ways,” said Jelisavcic.
Sometimes, he said, they have an edge because they know an industry well—like financial services (particularly broker-dealers) or energy. Sometimes they have an edge because they understand a process well—like liquidation. And sometimes, their edge is due to the complexity of the opportunity:
“[T]here might be a particular legal controversy that would be very difficult to understand and handicap and as a result...our competitors may either overlook that or simply decide not to devote the necessary resources to understanding the particular complexities whereas, given my legal background and the legal background of the head of our claims sourcing team, Brad Max, we may well make an investment decision to spend a lot of analytical time and resources and really crack the code and understand that complexity.”
Case in point: the Tribune Company.
The firm, which owns the Chicago Tribune and the Los Angeles Times, among other media properties, emerged from Chapter 11 bankruptcy around December 2012.
“It was a large case, pretty well followed and pretty well understood,” said Jelisavcic. “Virtually all of our competitors invested in the holding company bank loans but there was one very much overlooked, very unique niche aspect of Tribune, and that was the operating company trade claims.”
These trade claims, against about 100 Tribune subsidiaries—including radio stations, regional newspapers and TV stations—were worth a total of roughly $80 million.
“Our competitors understood the economics of Tribune well,” said Jelisavcic, “it's not that they didn't know these trade claims existed, I'm sure they did, but they looked at it and said, 'Wait a minute, there's only $80 million of debt, there's 100 entities, we could never accumulate a meaningful position.'”
Bowery looked into the deal, found these Tribune media subsidiaries to be “money good” and assessed that they were likely to recover 100 cents on the dollar. As the debt class was small and spread out, Bowery's internal claims sourcing team was able to buy the claims cheaply and they became the firm's largest single position in 2012.
“The case took six to nine months longer than we anticipated but we were able to fully recover, just as we anticipated, 100 cents in cash on all of the operating subsidiary lines,” said Jelisavcic.
Moreover, he said, because Bowery is “very agile and very good at entering and exiting positions, as a result of getting that cash recovery, the entire position was cashed out of our portfolio—so it was our largest position for most of 2012 and going into 2013, we had no exposure to it.”
Bowery's head of risk is another Longacre vet, Bill Gushard, who worked there with Jelisavcic before leaving to join Paulson & Co.. Since joining Bowery in 2012, Gushard, also a managing principal and portfolio manager, has worked with head of trading Tom Regal to trade the portfolio throughout the day, adjusting macro hedges as needed. Positions are structured asymmetrically, the goal being to generate gains when Bowery’s investment thesis is correct and protect capital as much as possible when it’s wrong (the fund's Sharpe ratio over the 12 months ending June 30 was 6.1).
Jelisavcic said Bowery typically employs two types of risk management and hedging:
“Number one,” he said, “our general portfolio hedges where...we'll segment our long book into equity risk segments, high-yield market risk segments, perhaps a commodity risk segment, and we'll try to hedge out that risk, typically with index products.
“And we also engage in what we call 'alpha hedging' which typically will be single-name cash shorts. We'll be short a cash bond or short a cash equity, occasionally we'll engage in various options strategies to try and optimize risk-reward in the use of capital.”
The firm, which launched in 2012 with $100 million now runs about $200 million, according to Josh Spindel, who oversees Bowery's marketing and investor relations. As for capacity, he said it depends on the timeframe:
“We think of capacity in two different ways—there's near-term capacity and there's long-term capacity because, our strategy is cyclical to a degree. Given where we are in the cycle today and our focus on smaller bankruptcies and smaller parts of larger capital structures, near-term capacity is probably about $300 million. Obviously that's going to change, and may be driven by tapering or other factors. When the cycle does turn in our favor—defaults pick up, rates tick up—we think it's a lot more likely that we could run at least $500 million.”
Bowery's minimum investment is $1 million and the largest segment of their capital base is institutional—endowment, pension and foundation investors. The firm also manages capital on behalf of funds of funds, family offices and high net worth investors. Jelisavcic said Bowery attracts institutional investors by operating according to “large-firm institutional quality standards” with respect to systems, procedures, compliance, accounting and reporting.
Spindel said that some investors see Bowery's version of distressed debt investing as a complement to their existing exposures. “Maybe they have exposure to the larger, brand name credit or distressed managers, many of whom we think are very good,” said Spindel. “So, sometimes our strategy will act as a complement to existing distressed credit exposures. That said, we think, and we certainly have clients who feel, that it stands very nicely on its own.”