Manager Sees Opportunity In Sectors Undergoing Change

Feb 24 2006 | 12:00am ET

By Deirdre Brennan 

Where some see chaos, Brian Riley sees opportunity. The managing partner of JB Investments Management, which opened up its fund to outside investors in September 2005 and now has $10 million in assets under management, puts a unique spin on distressed debt by targeting industry segments undergoing significant changes.

“We go into situations where there are industries undergoing structural change,” Riley said, explaining that such industries would have several companies in or near bankruptcy. “We wade into this mess, and then say to ourselves, ‘five years from now, here are the winners and here are the losers of this structural change,’ and we invest accordingly.”

Riley initially launched his firm in early 2001 as a managed account. Since then he has seen 55% annualized returns.

Riley’s background is in distressed debt. He worked for New York-based KPS Special Situations Funds, a turnaround private equity fund, for 12 years before striking out on his own in 2004. He views his new fund, JB Investments Fund, as a hybrid vehicle.

“We are a hedge fund because we invest in public securities, but we are much like a private equity fund in the sense that we hold our positions for a long period of time, have a small number of positions and intensely analyze each investment,” he said, adding that he holds positions for an average of two years and invests in both debt and equity.

Riley is focusing on two industries right now, predominantly the airlines sector and, to a lesser extent, the auto parts industry. “The airlines have been through a very difficult time, incurring huge losses and implementing massive cost reductions,” he said. “With the exit of some inefficient capacity, I believe the airlines are in the beginning stages of a recovery. I think the inflection point started in September or October of last year, so we think this party is going to go on for a while.”

Currently, Riley doesn’t take an activist approach to influencing companies or sectors.

“We don’t do it now because of our size, but we will look at that when we get bigger,” he said. “We would actively push where we have investments and where we could influence the fix on the industry.”

Brian Sweeney, chief operating officer of the firm, is currently speaking with potential investors.  “We have our own little quirks in that we’re different, so we are not going to fit every typical fund-of-funds or every typical family office,” he said. “So we have really been targeting people who are applicable and who can take the higher volatility and the higher returns.”

As for capacity, Riley believes that his strategy allows him to manage up to $500 million, and “in a recessionary situation it would be higher than that.”

The minimum investment in the fund is $1 million and the fees are 2% for management and 20% for performance. “What we think we are doing is exploiting an inefficiency in the market,” said Riley. “It isn’t a large one, but we think it can be exploited not just in tougher economic times, but in all economic situations. Structural change is occurring in the economy somewhere at all times.” 

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