CASE 3

Investment Approach And Process

The investment strategy is based on the following pillars:

  • Focus on risk-return: ensure that the expected return reflects the perceived level of risk, which is based on a holistic assessment of risk (macro, market, company, legal, and process).
  • Focus on relative value: due to the large set of investment opportunities, continually compare new and existing investments on the basis of risk and return.
  • Focus on valuation: despite exclusively investing in credit instruments, an understanding of equity value, and hence enterprise value, is crucial in understanding the margin of safety and coverage.
  • Investment thesis with more than one leg to stand on: in addition to having a great risk-return profile, an investment should ideally have a catalyst / event / contractual trigger to crystallize value.

The investment process is to a large extent driven by due diligence and based on a rigorous analysis of investment opportunities:

  • Opportunities: constant monitoring of secondary markets, key industries, and industry trends as well as companies on the shortlist.
  • Idea generation: utilize long-standing contacts with banks, brokers, lawyers, advisors, and management teams to identify investment opportunities.
  • Bottom-up Due Diligence: construction of detailed financial models, conversations with industry experts, conversations with competitors, customers, and suppliers, and management meetings.
  • Investment decision: committee decision in line with the above-mentioned investment philosophy.
  • Monitoring of investments: follow industries using a holistic approach, take into consideration the views of brokers and banks in secondary markets, continually update financial models, and meet with management on a quarterly basis.
  • Exit: strict discipline – sell investments as soon as the risk-return profile has become unattractive (e.g. target price has been reached and return has fallen or there has been change in perceived risk) and be creative when exiting less liquid investments.

We expect to focus on secondary markets and to primarily purchase instruments at a discount to nominal value, thus generating returns from interest as well as capital gains.

Risk Management

Investment risk is controlled on several levels:

  • Investment committee: decisions are made by the investment committee on the basis of rigorous analysis.
  • Liquidity: we largely invest in liquid instruments and only invest in illiquid instruments in smaller amounts (relative to the issue amount outstanding).
  • Diversification: our portfolios have a medium level of diversification of about 50 to 60 investments with an average position size of about 2%.
  • Monitoring: secondary markets, the operating performance of the company, and the development of its industries are constantly monitored. Action is taken once the risk-return profile has shifted.
  • Hedging: during times of strong market distortions, the manager will attempt to reduce the level of investment in the funds as well as employ hedging strategies.