Distressed investing — Step 1: Find opportunities with confidence

Part one of our six-part series to guide you through the steps of successful distressed investing

Distressed opportunities arise in many different situations and circumstances. Some of the more traditional situations include businesses that are underperforming, are suffering from debt maturity or have a bad capital structure. Consider whether they’re going through a restructuring or in creditor protection.

During any period of uncertainty, companies, private equity firms and other potential acquirers must weigh adjustments to investment strategies. While there have been recent examples of distressed business sales in Canada—particularly in the retail, mining, energy and technology industries—Canadian investors are often hesitant to enter the distressed market because of the perceived risks these deals can present, the lack of accessible information and, in most cases, assumptions about regulatory complexity.

Despite all this, we believe the Canadian distressed market provides good investment opportunities. If you’re able to deploy a team with the right experience to maintain speed and insight, you’ll be able to spot the right assets that have good fundamentals.

Move ahead with the right insights

Before you dive into distressed investing, make sure you’re getting the right information to evaluate opportunities with confidence. The best way to successfully navigate this market is through detailed financial analysis, data analytics and a network of well-established relationships. It’s important to quickly assess the quality of operations, management team and underlying infrastructure—separating the impacts of COVID-19 from the underlying issues.

Financial analysis: Make better and faster decisions with trusted and actionable financial insights. Prudent investors need to examine macro trends, analyze which industries are susceptible to downturns and find market inefficiencies based on these factors. Our proprietary distress models are based on metrics that have proven over time to be precise indicators of the events leading up to distress.
Data analytics: Investors need to see the big picture and identify distressed opportunities that aren’t immediately apparent. Using data analytics can help you get a complete understanding of a deal, visualize the impact of your options and make you more confident in your decisions. Our proprietary analytics tool features an algorithm and statistical software that have analyzed distressed situations over a 20-year period. Those insights into the distressed market, coupled with census and industry data, help us spot trends and patterns, which in turn drive our predictive and future-looking analysis.
Market presence: It’s not always what you know but whom you know. Having an established practice and global network on your side that knows the participants in the distress space is critical. This is where the leads materialize. Well-connected partners will also have an inventory of companies looking for investors—and they could help make the right introductions.

Now that you understand how to find a distressed company, the next step is figuring out the catalyst event that will prompt the timing of your investment. And so begins the strategy part of distressed investing, which we’ll cover in Step 2: Develop a strategy for superior returns.