Investment opportunities created by stress or distress have grown dramatically in the emerging markets. Daniel Chapman, Founder & CEO at Argentem Creek Partners (pictured) details how a disciplined, value-oriented investment approach together with deep experience and extensive networks are critical to generating alpha in these markets.
Investment opportunities created by stress or distress have grown dramatically in the emerging markets. Daniel Chapman, Founder & CEO at Argentem Creek Partners details how a disciplined, value-oriented investment approach together with deep experience and extensive networks are critical to generating alpha in these markets.
What opportunities do you see emerging in the industry in the near future, and how are you positioning your firm to take advantage of these opportunities?
High US interest rates, dollar and commodity volatility, geopolitical tensions are creating dislocations that create a very attractive opportunity set when combined. In emerging markets, we see the demand for our products and expertise growing, particularly for smaller and mid-sized companies that are disproportionately impacted during cycles of credit tightening. In seizing these opportunities, Argentem Creek Partners (ACP) seeks to deliver uncorrelated EM alpha by investing in special situations, private credit, high yield, and bespoke capital solutions across the capital structure. This can include distressed situations where the team helps restructure companies with limited access to international investment or financing but have good management and prospects. ACP uses investing to impact companies positively in its portfolio, with an emphasis on governance, transparency and employing best business practices.
In 2022, we established our regional headquarters in Abu Dhabi Global Markets for greater proximity to clients, deal flow and investors. Strong government support has fostered innovation, strong infrastructure, and highly skilled local talent critical for our strategic expansion and will enable us to take advantage of future opportunities.
What three key pieces of advice do you have for emerging hedge fund managers seeking to differentiate themselves in a crowded market?
Our success lies in the deep experience, quality and grit of our team, our networks, and a disciplined, value-oriented investment approach. These three variables have differentiated ACP returns and consistent alpha we have delivered to our investors. Working through decades of market cycles, the team has built longstanding relationships with local owners/management teams, legal teams, and advisors. These networks serve as an invaluable source for deal origination, risk management insights and exit strategies. This is particularly important in emerging markets when working through potentially complex jurisdictions and relationships are critical.
How are you approaching risk management, and what steps are you taking to ensure you have adequate risk controls in place?
Our portfolio of assets requires consistent macro and micro risk management from origination through exit. Strong culture, systems and processes are critical in translating varying views, collaboration, and intentions into focused execution. Key risks vary by investment and are identified, monitored, and hedged as appropriate on an ongoing basis at position and portfolio levels. Currency, duration, and portfolio concentrations are actively managed. Tail risk hedges are incorporated when there are heightened concerns or attractive asymmetric payout opportunities arise.
Has the approach to portfolio construction been changing, and how are managers managing portfolio risk in the current market environment?
Our specialised approach is unchanged. Our agility allows us to dynamically shift risk to the most opportunistic situations created by stress or distress, which have grown dramatically in emerging markets. We take advantage of these situations with a bottom up, limited constraints approach, often providing us with an advantage in a market that has become increasingly rules based. Portfolio construction varies by vintage, as markets have created different levels of attractiveness for different types of assets over time. Today, we see the scale of opportunity for our strategy as substantial, dynamic and diverse, even within relatively liquid opportunities, generating high conviction mid to high-teens returns.
What are some of the biggest challenges your firm is facing in the current environment, and how are you overcoming them?
We believe we are sized to be the best at what we do. However, COVID drove new capital to the largest managers, many of them passive investors. Last year, many real money funds suffered significant losses and currently face additional challenges with cash yields >5%. We think our differentiated approach and outperformance are starting to get noticed and greater traction from a more diverse investor base. We also believe the current environment is so opportunity rich that we can offer better liquidity terms, while still delivering attractive returns. To address this, we plan to launch our first evergreen fund in 2H2023, which will continue with the same core strategy but offer investors better liquidity.
Daniel Chapman, Founder, CEO, & Co-CIO, Argentem Creek – Daniel is responsible for leading the firm and co-management of the funds. He has more than 30 years of experience successfully negotiating and navigating businesses through major financial crises over decades of market volatility with a track record of outperforming major benchmarks. Prior to founding Argentem Creek in 2015, Daniel was responsible for all emerging markets risk taking activity within high-yield, structured, and distressed corporate credit at Cargill, Inc subsidiary, Black River Asset Management. Daniel was recruited by Cargill to help establish the business in 2004, building a successful and highly regarded global team, contributing to growing the firm to a peak of over $12 billion. Prior to joining Black River, Daniel was with JP Morgan New York for fifteen years, most recently as a Managing Director responsible for the distressed debt trading business. As the company underwent a series of mergers to become JP Morgan, Daniel managed various parts of the corporate credit business in emerging markets, most recently in the area of distressed corporate debt. He managed both proprietary risk as well as a client flow book. He was also responsible for managing sourcing efforts, directing credit analysts in the development of analytics, and working with legal counsel to develop strategies and manage legal issues related to workouts. While at JP Morgan, Daniel also established a private sector EM money markets business, reaching peak issuance volume of US$10 billion per year and developed the business into a leading EM corporate credit trading platform.