Q&A: Värde's George Hicks

Q: Värde started out as a distress investor and then diversified into areas ranging from residential mortgages to specialty finance. How did this evolution come about?

A: We've always been a value investor - Värde is Swedish for value - and we've always been event-driven, pursuing a fairly diversified approach in order to find motivated sellers. I am one of three founders and we cut our teeth at Cargill in the late 1980s, taking advantage of the default cycle in the early 1990s. We were in public and private markets in the US and we had a part of our portfolio in Europe. The whole philosophy is that we have to be in different marketplaces so we can find the best risk-reward. As the business developed we started to add other types of assets and business lines that made sense.

Q: To what extent are you dependent on cycles?

A: A lot of folks look at the big default cycles - 1991, 2001, the global financial crisis - and they think that defines the business. The reality is those cycles play out over many years in a lot of different jurisdictions; the global financial crisis happened in 2008 and we are still investing in paper produced by it. In general, as a distress player, we are not dependent on cycles. Additionally, our business has broadened quite a bit to include things like private debt, consumer finance portfolios, real estate, which are not driven by the same default cycles.

Q: How resource-intensive is your business model?

A: Initially our strengths were in financial and legal analysis, and the workout of assets. As the business evolved, a couple of things happened. First, while we don't call ourselves a debt-for-control player, we started to take control of companies and assets and that called on more of an asset management and value-add capability. Second, you need an ability to understand every jurisdiction - legal capabilities, language skills - and that develops over time.

Q: Why did debt-for-control appeal?

A: In most restructurings, particularly in the US, you have a company that goes into bankruptcy and maybe the debt structure is trading at a discount to the asset value. You restructure with a package of debt and equity and that is what goes to the debt holders. So we are very used to getting equity. Over time we came to the view that there were some companies and assets we wanted to hold for the longer term, take control and add some value, and really get a multiple for our work. Debt-for-control and some of our outright private equity businesses now account for 20-25% of our assets.

Q: Bank retrenchment is a rich source of deal flow for Värde, but President-elect Trump has indicated he might take a different approach to financial regulation compared to the Obama administration. What is the likely impact on deals coming out of banks?

A: The restructuring of the financial industry had its roots in the global financial crisis and the belief that a lot of financial institutions had become too complicated. We are still analyzing the potential impact of the Trump administration. However, it only concerns the US, and even under some of the approaches the Republications are talking about, banks would still have a high equity requirement. While some reins might be loosened, I don't see the trend line changing until we end up with the financial institutions that the regulators and public think we should have.

Q: Last year, Värde was part of a consortium that bought Latitude, GE Capital's Australia and New Zealand consumer credit business. To what extent does this represent a classic bank retrenchment deal?

A: Bank retrenchment can play out in a couple of ways. One is where we've bought businesses that financial institutions are selling because they want to simplify their balance sheets or get out of the business. We've also had the opportunity to provide capital at interesting returns which previously had been provided by banks. For example, we've got a business line that is very strong in smaller balance commercial real estate mortgages in the US.

Q: What have been your experiences of Asia?

A: Our first foray was in the late 1990s during the Asian financial crisis. We found it very interesting but we didn't have the capabilities to be really hands on. We understood from our experiences in Europe that having a physical presence is important, so we opened an office here in 2008. We've always had a partner in charge of that office, not a young analyst - we want to make sure the culture, underwriting and due diligence were consistent with our investment and operating philosophy. Our initial exposure in Asia was in Japan, Australia and New Zealand, which have predictable legal systems. Building off that base, we've invested in a lot of different jurisdictions. Indonesia and India are a couple of places where we continue to build.

Q: How do you get comfortable with markets like Indonesia where enforcement can be tricky?

A: In the US you are very comfortable buying bad debt in the early part of the process because there is a predictable legal process. In Europe that isn't always true. In Italy, for example, we only get involved at the tail-end of the legal process. It's the same in Indonesia. If you are enforcing your rights, you need to find ways to do so without getting boxed up in the legal system. We have made some initial investments in Indonesia and India that have worked out so we have built on them. As an indication of our commitment to Asia, Ilfryn Carstairs - who becomes co-CIO alongside Jeremy Hedberg and me as of January 1 - will relocate to Singapore.

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• Topics
• North America
• GPs
• Restructuring
• Credit/Special Situations
• South Asia
• Southeast Asia
• Värde Partners
• USA
• India
• Indonesia
• Australia
• Structured finance