Looking at where investors should consider for value in local currency emerging market bonds, Alex Kozhemiakin, head of emerging market debt at Standish, sees the most value in Latin American markets such as Brazil, Mexico and Colombia, as well as in South Africa. Kozhemiakin commented: “We view other local currency bond markets of the Europe, Middle East and Africa (EMEA) region as less fundamentally attractive and feel the Asian markets are expensive. In US dollar debt Standish favours some EMEA countries, including Kazakhstan where we see very good value in some quasi-sovereigns backed up by high oil prices.” Standish also favours Lithuania, citing its strong credit quality. Colombian external bonds are also favoured. Across US dollar-denominated debt, Kozhemiakin sees more value in quasi-sovereigns and corporates than in sovereigns, particularly for the larger, highly rated countries.
Regarding the emerging market corporate debt universe, Rodica Glavan, Insight Investment’s emerging market debt portfolio manager, sees pockets of value in places like China but cautions that investors have to be distinguishing in their choices. Glavan also sees some value in Indonesia but is less positive on South Korea and Taiwan.
Calling Eastern Europe interesting with fluctuating dynamics, Glavan says: “There is not an appealing level of diversification available in these markets just yet. Turkey and Russia may have more issuance than Hungary or Poland but of course, you have to be cognisant of what is happening in these countries at a political level. Latin American issuance has risen in places like Mexico and Brazil but also in Chile, Colombia and Peru. As a result of a lot of good quality in Mexico it has become somewhat expensive whereas Insight does see some value in Brazil, which had a difficult year in 2013.”
Better pricing of side pockets for 2014 Over the last nine months the pricing of hedge fund side pockets continued to improve relative to previous trading periods, reports Cattegatt Secondaries, the London-based broker for private equity and illiquid hedge fund interests. This can be attributed to an improved economic landscape which has resulted not only in better market liquidity but also a more active M&A climate for exits. As a result, the time investors have to wait to get their funds back has lessened, thus making these type of illiquid securities more attractive. The $100 billion market for illiquid hedge fund side pockets started in 2009 and was predicted to last for one or two years until it was cleaned up, i.e., the illiquid holdings had been realized and turned into cash. The market recovery lingered, however, causing slower than anticipated conversions.
The improved economic climate over the last six months has increased the activity of deal flows from investors. The reason for this is that not only have discounts narrowed due to increased transparency and market liquidity, but also there are now more investors interested in these types of assets.
There has been a surge in interest for hedge fund side pockets from an increasing number of buyers. Prior to 2013, the secondary market was dominated by a few highly informed specialized investors. Since then, and especially this year, a wider audience of alternative investors has started to bid on these assets, as a result of the lower perceived risk due to the improved climate, bringing more clarity to the underlying values.
While previous years may have been characterized by larger portfolio sales from forced sellers and only a handful of buyers, deal flow seen by Cattegatt over the last 12 months has featured an increased amount of smaller pieces from motivated, yet price-sensitive, sellers, which are being ‘auctioned’ to the best bidder from amongst a cluster of competitive buyers. These are typically holdings that investors have chosen to keep, despite their high maintenance to administer, as opposed to selling at a steep discount; a sale which now, however, can be avoided.
The second type of deal flow observed by Cattegatt has been so called managed exits from seed investors, i.e., large investment banks or asset managers that once took a large share in hedge funds in return for seed capital. A third type of deal flow has been more esoteric hard-to-value and hard-to-sell assets. Even though asset prices have also improved here, they are still steep, especially considering the fact that some managers are prepared to bid at only a fraction of their reported face value. These are typically distressed, non-performing holdings for which no reliable or current valuation exists. These types of side pockets attract fewer buyers than the high-grade funds, but still more than a few years back, offering a good relative opportunity to clean up any legacy holdings.
Finally, Cattegatt reports an increased number of investors using the secondary market for ongoing but closed funds. These are typically funds with less liquid redemption terms and which trade at prices close to par or even at a premium, depending on the quality of the fund manager. Using the secondary market is attractive for managers when rebalancing their portfolios, since it not only gives them access to liquidity but also enables them to deploy capital to attractive opportunities in a time- effective manner. THFJ
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