Market and Investment Outlook 2023 Q4
A view by our Lead Portfolio Managers
As small cap stock pickers, we are always on the lookout for companies with idiosyncratic drivers. One area we found particularly attractive is the M&A and restructuring advisory industry. In fact, we informally call them the “Anti fragile” stocks, a term coined by Nassim Taleb. The M&A and restructuring industry doesn’t merely withstand shock and crisis but benefits from it.
Among the key players in the industry, two stand out as noteworthy investments for our portfolios: FTI Consulting and Houlihan Lokey. These firms possess significant expertise in navigating complex restructuring scenarios and have proven their mettle through their long term performance.
FTI Consulting boasts a comprehensive suite of restructuring consulting services, and is often characterized as a “turnaround consultant”. The company will assume management responsibilities for companies undergoing restructuring, including strategy work, providing guidance, and executing operational and cost saving initiatives throughout the process. The company’s financial profile is uniquely balanced, combining restructuring practice with offerings in mergers and acquisitions, antitrust, and forensic consulting. This diversified business model enables FTI Consulting to weather various market conditions effectively.
Houlihan Lokey, a leading financial advisor, has played a prominent role in countless major bankruptcy proceedings over the past three decades, including high-profile cases such as Enron and Lehman Brothers. The firm excels in negotiating on behalf of both debtors and creditors during bankruptcy proceedings, advocating for optimal outcomes. Houlihan Lokey’s comprehensive model is further fortified by its mid-market mergers and acquisitions advisory and financial valuation services, ensuring a balanced profile across different market conditions.
These companies have demonstrated their resilience by providing positive returns during periods of market meltdowns, such as the onset of the Covid crisis. Furthermore, their exposure to merger and acquisitions activities positions them for continued outperformance during strong market recoveries.
A trifecta of higher interest expenses, weakening underlying cashflow and looming maturities are affecting a wide swath of companies both public and private.
After a rapid rise in rates, the reverberations across the corporate realm become increasingly apparent. The sheer volume of outstanding debt, which is orders of magnitude greater than in previous periods, presents a global phenomenon that demands attention. From high-grade to high-yield debt, companies around the world are grappling with an unprecedented level of financial strain. Unlike the complex catalysts that precipitated the Great Financial Crisis, the primary cause this time is straightforward: higher interest costs.
Source: Moody’s Investors Service
Note: Credit metrics are medians and historical figures may change due to timing differences in issuer reporting. Debt figures refer to gross debt.
1Data as of May 18, 2023
Changing consumer habits, geopolitical tensions and supply chain disruptions are upending entire sectors. From specialty retail to commercial real estate, we are seeing record levels of bankruptcy filings on par to levels of GFC and Covid.
To compound matters, the volume of debt in need of refinancing is expected to surge in the coming years. Coupled with higher interest rate and weakening fundamentals, the need to restructure distressed debt will increase going forward.
As equity investors, we obviously wish the global economy can perpetually grow in a stable manner. The reality is that the world is changing and changing fast. Companies are facing multiple challenges from climate change (I.e. storm insurance), technology disruptions (i.e. AI), geopolitical conflicts (i.e Russia, China) and more. These changes will create winners and losers which leads to the need for M&A and restructuring. Hence, we find that advisory firms such as FTI Consulting and Houlihan Lokey are uniquely positioned in an uncertain world.
A view by our Lead Portfolio Managers
A view by Mathieu Sirois Lead Portfolio ManagerU.S. Small Cap Strategy
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