Smart-Stock.net

Over at EurekaHedge, there is an informative article by Dean Menegas (General Counsel, Spinnaker Capital Group) about distressed asset investing that is worth summarizing.  One especially relevant point Menegas makes is that a distressed asset is “severely depressed for a reason particular to the issuer and not because of general market conditions.” With all of the doom and gloom at play in the U.S. market today, this is a point worth remembering.

Menegas goes on to distinguish between several types of distressed assets.  An event-driven distressed investment is one in which a specific event or change will increase the value of the asset at a later date.  Examples of this are debt restructuring, asset liquidation, or outstanding debt buyback.  Once the specific event has occurred, investors will see a gain from re-pricing of the asset.  A valuation-drive investment is one in which a distressed asset is purchased without a “transformative event” in sight.  Investor profit potential lies in either the market (price increase due to improved credit), cash flow, or a transformative event that increases the price.

Menegas stresses that wise investors don’t simply buy distressed assets because they are cheap.  Instead, they buy low-cost assets that have a reason to rise in the future- there must be a clear future value, even if the date of this increased value is uncertain.  Investors must therefore be prepared to hold onto distressed assets for as long as it takes for the changing marketplace to increase their value once again.

For investors, this means that research, patience, and sufficient resources are necessary in order to invest wisely in distressed assets.  So, while those around may be crying chicken little, wise investors know that even an economy in crisis offers up opportunities for profit.