Emerging markets restructurings provide a “triple play” opportunity for investors
By Gregory Bowes, co-founder and managing principal and Irene Rivera Calderón, associate at Albright Capital – Thoughtful investors will want to pursue investment strategies that can potentially achieve the equivalent to baseball’s rare “triple play,” ie, (i) attractive risk-adjusted returns, (ii) portfolio diversification benefits, and (iii) positive social impact. Providing restructuring support and/or private credit to EM companies suffering from macro events outside of their control may be such a strategy.
Experienced investors understand that major credit dislocations offer the prospect of attractive returns and positive portfolio diversification benefits, as was the case with the Latin American Debt Crisis of the 1980s and the Asian Financial Crisis of the late 1990s. Throughout this period, more localised financial crises and idiosyncratic corporate stress events have also yielded attractive returns to investors.
On the other hand, investors may be less aware of the potential for positive social impact of an EM restructuring and private credit strategy.
Impact investing continuum
Stepping back, as an investment firm committed to advancing social and economic development in emerging markets since inception in 2005, Albright Capital celebrates the mainstreaming of impact intentionality and ESG integration into private investment strategies.
However, for some investors the proliferation of ESG/impact labels and approaches understandably raises more questions than answers. For most investors, these questions have at their core: “is this strategy appropriate for my mandate?”
The extremes are relatively easy to identify. On one end, there are strategies that sacrifice financial returns and provide concessionary capital in the interest of advancing a particular social good. On the other end, some strategies seek financial returns above all, with only a modicum of ESG review as a form of financial and reputational risk management.
Albright Capital believes there is room for both approaches and everything in between, and ultimately investors must decide how to prioritize financial and impact goals according to their mandates.
“Triple play” strategies tend to fall outside of these extremes, and require interdisciplinary skills and perspectives. Especially in emerging markets, it takes principled, pragmatic, and experienced investors to effectively integrate financial and social impact objectives into the investment process, because promoting development always presents difficult tradeoffs.
Important questions must be asked and answered on a case-by-case basis. Does the company provide a valuable service to its community? Is the management team up to the challenge? Does the company have a defensible business model? Is the company stressed by events outside of its control, or has management failed in some fundamental way?
Is there excessive currency risk? Can any residual currency risk be managed or mitigated in the deal structure? Is there sufficient negotiating leverage to structure the investment with important downside protections to minimize exposure to further potential macro volatility? Does the company take seriously its responsibility to a wide array of stakeholders?
Need for socially-conscious restructurings
Sustainable Development Goal (SDG) target 17.4 highlights the need to help developing countries attain long-term debt sustainability through “coordinated policies aimed at fostering debt financing, debt relief and debt restructuring…”
Such efforts should include corporate as much as sovereign debt resolution if EM economies are to resume sustainable growth. This is now more urgent than ever given the dramatic and widespread global impact of COVID-19, especially in emerging markets given pre-existing stress and capital shortage.
Socially-conscious investors should prioriti e revitali ing a company and restoring competitiveness over the medium term. Regrettably, thus far EM corporate restructurings have largely occurred outside of the impact investment environment, and generally involve short investment horizons, liquidation of assets, and/or large-scale employee layoffs.
As such, the absence of impact investors and development finance institutions from the restructuring space can have profoundly negative implications since it relegates corporate restructurings to investors unconstrained by the social implications of their actions.
Albright Capital believes the current market environment creates a “triple play” opportunity for investors to potentially generate (i) strong financial returns (inherent in major credit dislocations), (ii) portfolio diversification benefits through uncorrelated returns, and (iii) positive social impact by helping worthy companies survive and emerging markets become more resilient.