(Valor Econômico) Disbursements in the segment are expected to range between R$ 10 billion and R$ 15 billion this year, a record level, according to consultancies and funds
By Fernanda Guimarães — São Paulo
10/06/2023, 05:04 AM Updated a week ago
By occupying a space often underserved by the traditional banking system, the industry of asset managers specializing in special situations, known as "special sits," is expected to close the year with disbursements between R$ 10 billion and R$ 15 billion. This estimate, collected by Valor from consultancies and asset managers, is projected to reach record levels due to increased demand from companies and the entry of more firms into this niche.
The investments made by this asset class are not yet compiled by the market, but the growth of these managers has prompted Abvcap, the association representing private equity and venture capital funds, to include these firms as members. The goal of the managers who joined the entity is to advocate for shared demands. According to Valor, one of their priorities is finding a solution to the disregard of loan collateral in judicial recovery contexts, an issue that has affected some firms.
The managers are also forming their own group, establishing the Brazilian Association of Special Situations and Litigation Finance. This move highlights the growing attention the sector is attracting.
Contrary to what the popularized name suggests, “special sits” do not exclusively focus on investing in distressed companies. Often, these managers—who have flexible mandates to operate in areas such as credit and equity participation—structure more complex financing arrangements and serve where traditional banking credit does not reach, either due to a lack of traditional guarantees from borrowers or insufficient knowledge of the asset.
The maturity of this product in Brazil also explains the level of disbursements. Over the past five years, the number of managers specializing in this niche has more than doubled, reaching 32 independent firms, according to a survey by Spectra. This number does not include financial institutions operating in the field.
Daniel Wainstein, a partner at Seneca Evercore, a boutique focused on mergers and acquisitions (M&A) and restructuring, says that at the start of the year, these funds provided liquidity to many companies struggling to access bank credit. At that time, financial institutions were hesitant, and capital markets were closed due to the Americanas crisis. Now, with the start of the interest rate decline cycle and the reopening of debt issuance markets, the scenario has returned to normal, he says. As a result, he notes a stronger presence of structured transactions, often involving companies with fewer traditional guarantees.
The growth of this industry, however, has occurred in a challenging context. Even with increased demand from companies at the beginning of the year due to tightened credit and balance sheet adjustments, conversations at Farallon, for example, gained traction only in the second half of the year, alongside the beginning of the interest rate cut cycle in Brazil. “In the last quarter of last year and the start of this year, we saw worsening credit conditions in Brazil, with major banks becoming more selective and companies facing a combination of capital demand and operational challenges. In the second half, with the start of rate cuts, business sentiment began to improve,” says Antenor Camargo, the partner responsible for the manager’s Latin America operations. “While it’s still early, we’ve seen more entrepreneurs focusing on solving their capital structure issues, making the credit environment more attractive for our investment profile.”
Despite this, Farallon’s disbursement this year is set to surpass 2022.
Renato Azevedo, a partner at Latache, says the path to maturity for the special situations industry is long but inevitable. “We’re likely to see increasingly sophisticated and scalable negotiations,” he says. At Latache, investment focus is on returns, which often come from “less obvious and more complex opportunities,” not necessarily from financially distressed companies.
Out of 50 cases that reach the firm, only two are closed, Azevedo says. “The margin for error in special situations is smaller; we need to be more assertive,” he comments. “These could be cases where the check isn’t very large, the guarantees aren’t obvious, involving companies in more remote areas, a firm that’s undergone restructuring but still lacks bank credit, or a company with a reputational issue.”
For Azevedo, the concept of special sits is more about mandate flexibility. According to him, Latache’s disbursements this year have already reached R$ 600 million, surpassing 2022. Some investments that were postponed last year are being executed now. “Last year was turbulent due to political issues; we wanted the election results before committing to investments.”
Fábio Vassel, president of Starboard, says the combination of a closed capital market and high interest rates this year has brought more opportunities to the table, with lower-risk assets. “This year’s investment batch should outperform previous ones, with less risk,” he says.
One of the firm’s funds, established a decade ago, includes assets in the energy and infrastructure sectors, as well as music royalties and real estate retrofit projects. This year, the firm completed deals such as acquiring a 38% stake in the Bolivian section of the Brazil-Bolivia gas pipeline and a share in the Pampa Sul thermoelectric plant.
In the special sits market, Starboard is one of the few firms focusing on equity—it doesn’t provide credit, only capital injections in exchange for equity stakes. “We closely evaluate the target company’s cash flow, business model robustness, and how our capital can unlock a situation,” says Vassel.
In periods of lower interest rates, increased investor competition, and open capital markets, the firm can shift to more stressed targets, where higher risk and returns are proportional. This year, Starboard has made six investments after years of portfolio divestment of mature cases.
At Vinci SPS, the fastest-growing investment thesis this year was capital solutions—in practice, providing credit to companies. “It’s been a busy year, and we’ve ended up growing with larger companies. The banks pulled back, and we filled that gap,” says Marcelo Mifano, who heads the firm, now part of Vinci. Another growing area was purchasing precatórios (court-ordered government debt), tax credits, and litigation assets, as more companies sought to monetize “hidden assets on their balance sheets,” he explains.
Focused on legal claims—purchasing credits from legal disputes—Algarve Capital expects disbursements of R$ 700 million this year, including invested and committed amounts, compared to R$ 540 million in 2022. Daniel Cardoso, a partner at the firm, says that as this type of investment matures in Brazil, volumes have room for further growth. “There’s still a path to follow. This is a product for deep pockets but is beginning to reach retail,” he says. According to him, the trend is for this type of investment to feature listed products in the stock market, like real estate funds.
Specializing in purchasing overdue credits from small and medium enterprises (SMEs), BrD - Brasil Distressed has seen its disbursed and committed resources double this year, reaching R$ 80 million. “All special sits investment theses have grown significantly this year,” says Marcio Fujita, a partner at the firm. According to him, the beginning of the year saw greater competition for purchasing these credits, which has since normalized.
“This is a market that has grown exponentially in recent years, presenting investment opportunities with high returns. However, it also comes with significant risks, involving complex and high-risk legal operations. Outside Brazil, this is a trillion-dollar market. Brazil is starting to join this club more intensely,” says Guilherme Setoguti, president of the Brazilian Association of Special Situations and Litigation Finance.
Published in: https://valor.globo.com/financas/noticia/2023/10/06/gestoras-de-situacoes-especiais-crescem-e-comecam-a-se-organizar.ghtml
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