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Alt-credit investor Alpha Blue Ocean eyes funding squeeze with novel convertible bond investment model

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Alpha Blue Ocean, the London-based alternative credit investor, is eyeing growing funding opportunities arising out of the sharp economic downturn following the coronavirus outbreak.

The firm focuses mainly on the healthcare, energy and technology sectors, targeting typically smaller and medium firms forced to innovate to create growth to sustain themselves, rather than major well-established companies at the top of their curve, said CEO and co-founder Pierre Vannineuse.

The EUR300 million manager’s novel convertible bond-focused investment model provides financing for small and dynamic start-up companies unable to access traditional bank lending, or preferring a less dilutive alternative to straight equity when valuations are low.

“Credit has never been cheaper than it is today, yet is not available to many smaller and medium enterprises, so they have large difficulties in funding themselves,” Vannineuse told Hedgeweek in a recent interview, noting that in an environment of cheap credit, banks have no incentive to offer what might be perceived as risky loans.

Utilising elements of hedge fund, private equity, and credit investing, Alpha Blue Ocean’s strategy provides funding to companies via convertible bonds with stock warrants attached, which are later converted to equity stakes when certain conditions are met, with the companies receiving the cash in tranches over a pre-agreed timeframe.

The firm, launched in 2017, uses machine learning models and real-time data mining techniques to identify potential investment opportunities and valuations. Systematic trading signals help the firm to respond quicker to changing micro- and macroeconomic environments.

The portfolio is built towards maximising certain factors including liquidity, minimal market impact, long gamma exposure while minimising theta cost, and rational volatility capture on unexpected market events.

“We look at 10 per cent return on structured loans and exposure to upside with the warrants. We have closed 50 transactions of this nature in three years of operations,” he said.

The strategy is sector-agnostic, and aims to build a diversified portfolio of warrants providing what Vannineuse describes as “systemic exposure to potential rebounds.”

“Markets are very volatile now, and investors and markets now have a much shorter-term view, rather than long-term fundamental plays,” he said. 

“We’ve seen this before with cannabis, we’ve seen this with blockchain – the world is in a short-term mode, rather than making investments based on fundamental research. Markets do not react in the same way they used to.”

The financing is typically used for working capital or for funding a company project quickly. Certain lending scenarios may include M&A transactions, clinical trials in healthcare, or new exploration projects launched by junior mining firms.

“Let’s say you have a biotech firm with a USD10 million market cap embarking on phase one of a clinical trial. They need to secure USD20 million over the next two years to be able to start this clinical trial. It’s going to be difficult or near-impossible to raise either debt or equity with such a valuation,” he said.

“Our type of solution is the only one realistically suitable for them, because we can commit to giving them the USD20 million, and also to commit never to exceed a certain percentage of ownership because we sell the shares that we get from the conversions.”

Vannineuse specialises in the healthcare, energy and IT sectors, having started his career in the oil and gas sectors, later moving into M&A as a quant modeller.

Before co-founding Alpha Blue Ocean along with COO Hugo Pingray and executive director Amaury Mamou-Mani, Vannineuse was founder and CEO of Bracknor Investment Group, a Dubai-based family office, along with Pingray.

Observing the prevailing market backdrop, he said opportunities across sectors have surged since the Covid-19 outbreak brought economies globally grinding to a halt. Pre-pandemic, Alpha Blue Ocean would send between six and seven term sheets per week to potential investment targets. Now, though, that number is around 20, according to Vannineuse.

Firms require “quick solutions” as a result of the slump, he said, adding that relief programmes provided by governments to ease the impact of the coronavirus crisis is only a temporary solution.

“Right now, we have these situations across the board,” he observed, pointing to several firms whose values have halved during the coronavirus pandemic and others who are tripping covenants.

“Because we are an alternative lender and a family office, we can react and close a deal in less than a week which is very difficult to find anywhere else. We can make money immediately available. For an alternative funding strategy, that’s where you want to be.”

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