Whether you're new to the world of finance and business or you're a seasoned investor or business owner, special situations funds are seen as the ultimate in active fund management by some – although others claim they're little more than a vanity project for stock pickers.
Whatever side of the fence you sit, there's been a growing trend for alternative capital and special situations funds in recent years, so understanding your options, whether you're a business owner or an investor is important.
A special situations fund is a type of investment fund with the sole purpose of making a profit from a special situation. This refers to a company involved in a takeover or a business that is in financial difficulty and refers particularly in relation to investors who hope to profit from these circumstances, by making gains from a potential rise in valuation.
Special situations investing aims to make control-oriented debt and equity investments by looking at companies that have an element of distress. Special situations investors are able to sense opportunity, and 'buy low, sell high'.
Opportunities can take many forms, but they often arise from breaking news stories or rumours of news about to break about a company that could affect a company's short-term prospects. A special situation can arise in any industry at any point in an economic cycle so knowing and understanding what signs to look for is important in special situations investing. This also makes investing in special situations incredibly risky.
Philip Richards, one of the founders of RAB Capital discovered this during the financial crash in 2008 when the RAB Special Situations (RSS) fund bet on Northern Rock and lost virtually the entire investment.
A traditional way for a company to make money is through buying and selling goods and services, however, increasingly, companies are making money from certain special situations. These investment opportunities arise when companies become involved in certain financial transactions that are seen to create additional value for their shareholders.
Unlike traditional avenues for raising funds, special situations funds tend to be developed very quickly. Opportunities are identified and often the additional shares are launched within a few months.
Special situations funds are not designed for long-term investment but are instead a way for businesses to access working capital in a relatively quick and easy way, particularly for those businesses who otherwise would have successful business models that have been threatened by external factors such as COVID-19 and/or Brexit.
The beauty of special situations funds is how diverse they are. Special situation funds can be found in any atypical event that potentially impacts the future course of a business, thus impacting the company's value.
Special situations funds are an offshoot of a hedge fund and are often headed up by a separate team because of how specialist they are.
Opportunistic credit pursues risk-adjusted returns by investing in mispriced shares across special situations. The market for opportunistic credit is being driven by the increasing number of private debt lenders who are in the market looking for businesses to invest in.
Debt investing is an alternative form of investment and involves investing capital in the existing debt of a company, government, or other public entity that is in a state of financial distress. A company is deemed financially distressed if it has an unstable capital structure.
There are three things distressed debt investors look for when assessing a company:
1. Financial distress
2. A successful business model
3. A product or service that is in-demand
Ultimately, distressed debt investors look for good companies with bad financials.
Special situations investing is highly specialised and those seeking to invest in special situations funds must do so through a hedge fund manager. Because of the nature of the funds, only those who are considered true investors can invest large sums of money, whereas the average person either cannot invest or can only invest small amounts of capital.
If your business is in financial distress you must act swiftly. We know that owning and running a business can be stressful at the best of times, but when there are financial difficulties it can be confusing to know what the best course of action is.
As we've mentioned, special situations funds are a great way of raising capital quickly when your business is in difficulty, however, there are other options available to you, including a short-term business loan. Whilst this is technically creating new debt to repay old debts, having an injection of cash can help alleviate the immediate cash flow pressures and could prevent any legal action from being taken against you.
You could also look at the way your company is currently operating and see if you can make adjustments. This could be by outsourcing certain roles and responsibilities, selling off assets, and even offering loyal customers additional rewards or discounts.
Of course, as with any financial business decision, it's important that you seek professional advice from an independent advisor.
If you need more information about how we can help you raise funds, you can get in touch with one of our specialist advisors. We tailor all our loans to suit you and your business needs because we're here to help you succeed.
27 January, 2022