contrariancapital - contrariancapital.com
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Investment Philosophy
Why focus on distressed investing?
When bonds / bank debt trade from a yield curve to a value basis, e.g. following an event such as a bankruptcy filing, it is often a very inefficient market where assets can trade at significant discounts to their inherent value. This can be caused by a number of factors, including: technical selling pressure when institutional and traditional investors are forced to sell due to credit downgrades or other constraints; lack of institutional research; limited market-making activities resulting in illiquidity.
Additionally, distressed situations exhibit high barriers to entry: they require considerable knowledge of the restructuring process, bankruptcy law and individual companies’ legal documentation, and conventional valuation parameters are often inadequate.
This creates opportunities for firms such as Contrarian – with the necessary experience and expertise – to capture the ‘spread’ between a security’s trading price and its inherent value and, over the long term, generate equity-like returns with the protection of being a creditor.
Identifying off-the-run distressed investment opportunities
-Search for less-heavily-trafficked ideas away from the crowd
-Specialize in privately-traded instruments with significant barriers to entry
Research beyond the numbers
-Strict requirement that all research is performed in-house
-Get behind the numbers and seek an ‘edge’ in each situation –
gain a more accurate understanding of a company’s capital structure,
legal framework and documentation and/or prospects than our
competitors / the market
Focus on a company’s fundamentals
-Identify good businesses with solid management, but bad balance sheets,
that will revalue once the capital structure has been fixed
-Strong bias towards cash flow positive businesses (3-6x EBITDA)
-Preference for manufacturing (hard assets) versus service businesses
-Never buy what will ‘go away’ in bankruptcy
Teamwork
-Ideas are analyzed from multiple perspectives by multiple investment
professionals in an effort to minimize fundamental research errors
Long Term Superior Return on Capital
Our goal is to achieve superior rates of return on capital while protecting the downside on every investment. We focus on preservation of capital and use a team approach to reduce/ensure we have thoroughly considered the merits of each investment.
Alignment of Interest with our Investors
We believe that it is important to have the interest of all of our personnel aligned with those of our investors. Every employee participates in a 401k plan that includes investments in the strategies we manage. In addition, the firm does not allow personal trading, which ensures that every good investment idea finds its way into client portfolios.
Reliance on Proprietary Research
We believe that our propriety research is not only an advantage but it is an absolute requirement in order to achieve the level of return on capital we expect from our investments. The market is far too competitive for anything other than in-depth analysis of a company, its competitors, and the markets in which it operates.
Team Approach
We believe that working as a team eliminates investment mistakes, which is the best way of ensuring superior returns. We have a lack of hierarchy and a workspace design that we believe fosters communication and cooperation. In addition we have a unique form of compensation designed to encourage team work. Each member of an investment team receives compensation based on the performance of the particular strategy which is their focus and in addition they receive additional compensation based on their contribution to other strategies. We have found this to be highly successful in encouraging the teamwork necessary to achieve the excellence we strive for in portfolio management.
Client Communication
We are always available to meet with clients and discuss our outlook on the markets as well as the particular strategies in which they are invested. Our quarterly letters provide an insight into each strategy in which we operate, fostering an openness of communication that we hope is helpful to our clients in understanding trends in different sectors of the market.
Contrarian Advantage
Unparalleled experience and continuity among partners and investment professionals
-Experience of managing distressed assets through multiple business cycles, with core competencies in privately-traded instruments such as bank debt, trade claims and rejected real estate leases
An expansive network of proprietary contacts facilitates the sourcing of off-the-run, uncorrelated investment opportunities
-Proven ability to source unique investment opportunities from traditional and non-traditional channels over many years. The best value often resides in private securities sourced directly, rather than through broker-dealers
Intensive proprietary research process aimed at minimizing errors in fundamental analysis
-Opportunities are analyzed by multiple teams from multiple perspectives with a view to going beyond the numbers and finding an edge. The process is enhanced by the breadth of investment professionals’ backgrounds and fluency in European and Asian languages
A unique culture of teamwork and professional development
-Provides employees with a clear career progression path not often available in alternative asset managers and has resulted in minimal employee turnover since 2001
An unlevered track record for the Diversified Distressed Strategy dating back to 1986
-Contrarian does not employ leverage . . . except one-off real estate transactions property level debt
For more information, visit
Contrarian Capital Management, LLC.
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