Investors at Fortress, Mudrick, Canyon, and Sculptor Capital share where they are finding top credit opportunities

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  • Fortress, Sculptor, Canyon, and Mudrick shared the most sought-after bets in the credit space.
  • Distressed-debt funds have experienced strong returns, up 12% for the year as of the end of August.
  • Private lending, SPACs, and bonds are top of mind for some of these managers.

Some distressed-credit investors scored big deals during the early months of the COVID-19 pandemic. Now firms are on the hunt for esoteric opportunities to capitalize off businesses that can’t easily get loans.

Distressed-debt funds have experienced strong returns, gaining 12.1% for the year as of the end of August, while the average hedge fund returned 8.6% during the same time period, according to recent data from Eurekahedge. 

While the Federal Reserve and the US government stimulus kept massive bankruptcies at bay, there were still plenty of distressed companies looking for help at the beginning of the pandemic. Investors that stepped in early saw good results on the back of a speedy economic recovery.

Last year, Fortress Investment Group, which has about $53.9 billion in assets under management, saw a lot of distressed opportunities in the public markets that have been “largely resolved,” Leslee Cowen, a managing director at Fortress, said at Anthony Scaramucci’s Salt conference on Monday. Now, the firm is refocusing its efforts on private lending, net leases, and special-purpose acquisition companies.

During the pandemic, Cowen said, the firm was able to grow its network of borrowers. 

“The reason why we were able to do that is because we were able to provide capital quickly, efficiently,” she said. “We knew how to do it, we knew how to structure transitions, and we were able to be of service to all kinds of companies in their times of need.”

And it paid off, she said. The companies Fortress provided capital to are focused on growth and are refinancing their balance sheets. 

Like Fortress, Sculptor Capital, which has about $37.3 billion in assets under management, was involved in the SPAC space way before the pandemic, Peter Wallach, the head of risk management at Sculptor, said. 

“What’s interesting about that market right now is the ability to invest at several hundred basis points. … So you could buy cash in the trust at close to 3% discount,” he said. “With conservative leverage and very little duration, you can access high singles, low double digits.”

Sculptor is also eyeing the convertible-bond market in Asia, since some areas haven’t recovered to their pre-pandemic levels. 

Canyon Partners, which manages over $25 billion in assets, is seeing corporate-credit opportunities with the potential to make double digit returns, Todd Lemkin, Canyon’s chief investment officer, said. The firm is also looking closely at real estate and special situations.

Jason Mudrick’s $3.6 billion firm is searching for mispriced securities, with a focus on overleveraged capital structures.

Overleveraged capital structures are attractive for Mudrick because they’re opaque and in transition, he said. 

They also need to have “a very unique skill set: contract law, bankruptcy law, negotiating dynamics, management won’t talk to you. They’re illiquid,” Mudrick said.

“There’s all these things and many others that allow these situations to be fertile hunting grounds for a strategy like ours,” he added.