Exceptional circumstances often offer exceptional investment opportunities
The spread of the coronavirus and measures to combat it continue to put pressure on the economy. Nevertheless, there are still interesting investment opportunities. Using private equity and distressed-credit strategies, investors can take advantage of opportunities even in the current environment.
Take advantage of exciting investment opportunities despite COVID-19
The current economic environment is suffering severely due to COVID-19. While some countries have taken the first step toward opening up individual sectors of their economies, the environment for investors remains challenging. Uncertainties about the intensity, duration, and length of the recession and its recovery directly affect a wide variety of asset classes, worrying many investors.
In addition to these challenges, however, these exceptional times also harbor opportunities for clever investors. Private equity and private debt, asset classes that primarily attract institutional investors, are increasingly open to private investors. Within the broad universe of different private market strategies, the Credit Suisse investment committee is focusing on two specific sectors in the current environment.
Profit from turbulence in the credit sector using distressed credit
Distressed-credit managers focus on a wide range of investment opportunities in the credit sector. In this case, "distressed" refers to financial distress. It is important to note that "distressed" can refer both to the actual investment and to its seller. Within the universe of distressed strategies, Credit Suisse is focusing its attention on opportunistic strategies that invest in the most attractive instruments based on the current economic environment and based on a relative comparison.
Diversification within the portfolio is equally important, which helps to protect the invested capital to the best possible extent. Unlike buyout and growth strategies, for example, opportunistic distressed debt strategies often hold more than 100 individual positions, thus preventing the excessive concentration risks associated with individual investments.
Benefit from unique investment opportunities in the current environment
Leading fund managers handpicked by Credit Suisse believe that the market turbulence caused by COVID-19 has ushered in a typical distressed cycle. This is likely to produce various – and in some cases, unique – opportunities over two phases.
The first phase is generally referred to as "economic shock." This phase offers attractive opportunities to acquire solid credit from buyers who are under pressure for liquidity reasons (e.g. to meet margin calls). "Distressed" in this context primarily refers to the sellers of these securities, which are often offered by well-capitalized companies.
The second phase is characterized by the mounting development of the recession. The focus shifts from illiquid sellers to fundamentally strong companies that have encountered solvency problems due to their balance sheet structure. In these situations, companies can be refinanced and restructured – for example, in the context of "debt for control" investments. Regardless, Credit Suisse currently ensures that, in using such strategies, it does not invest in sectors that are directly affected by COVID-19. This includes, for example, commercial real estate, accommodations, and the shale oil sector.
Take advantage of opportunities offered by venture and growth capital in the education technology sector
In addition to credit-focused strategies, there are also currently interesting opportunities to participate in the growth of privately held companies using equity investments. The education technology sector, abbreviated as edtech, is particularly attractive. Edtech concerns the ways in which recent technological advances have digitalized the education sector.
Studies show that the annual expenditure for education will increase approximately 50% by 2030, and will roughly match healthcare spending. In addition, the share of digital educational opportunities and tools makes up only about 3% of total education spending. On average, other sectors currently exhibit a market share of digital solutions of 15%–20%. The resulting investment opportunities encompass all fields of education, including kindergarten, primary schools, and universities, all the way through to adult education. The number of successful, privately held edtech solutions that have already been implemented are just as diverse. These range from learning platforms that promote independent learning to solutions that simplify the communication and transfer of content between teachers, students, and parents. The current environment offers further momentum to such investments, although they benefit from a principally secular trend that has long-term positive impacts.
While similar strategies invest in listed companies, leading fund managers handpicked by Credit Suisse see the greatest potential in privately held companies that are not listed on a public stock exchange and are therefore not otherwise accessible to investors. Private equity investors can use venture and growth capital funds to make capital available to these companies and participate in the development of these innovative companies. While venture capital pertains to the financing of younger companies, growth capital promotes the growth and expansion of established companies.