Alpha Blue Ocean: Convertible Arbitrage For Growth
Much of the coverage of the corporate lending space is in the private markets, with investors clamouring to get a piece of the growing private credit market. Of course, lending happens regularly in the public markets, too, but listed SMEs have similar challenges raising debt capital as private SMEs do, since the banks can’t and won’t lend to smaller, riskier firms.
Enter Alpha Blue Ocean (ABO), a hedge fund manager which plugs the gap.
ABO – the name is a combination of Jensen’s Alpha and the ‘Blue Ocean’ concept, a reference to a market with little or no competition – was founded in 2017 by CEO Pierre Vannineuse, COO Hugo Pingray and Executive Director Amaury Mamou-Mani. The duo had previously founded Bracknor Investment Group, a family office in Dubai. Vanineusse and Pingray decided to launch a hedge fund management company because they saw an opportunity in the listed SME lending market in Europe.
“We live in a growth-based economy and the growth has to be fuelled. SME’s are forced to be driven by innovation if they want to compete with these mega conglomerates and need financing to do that”, says Vannineuse. “That’s where we step in.”
ABO’s strategy revolves primarily around convertible bonds with stock warrants attached; it offers a line of credit to a company (the investee) which calls the capital by issuing convertible bonds to ABO when the investee company needs the money. The bonds bear no coupon, which means that the investee company is not incurring interest payments, immediately bolstering the capital structure of the portfolio company. The bonds are convertible to equity at a discount to the market price of the equity – usually 10% - so ABO’s risk is hedged. ABO can convert at its convenience, keeping control of market risk.
ABO is industry agnostic but liquidity is critical to the success of the investment strategy.
“I need something to happen, whether it’s good or bad. If it’s good, the value of my shares goes up and I’m going to earn more money. If it goes down, my model still allows me to earn money by converting. Essentially, we’re offering a cheap way to buy volatility."
“I prefer to invest into a company that has a EUR1million market cap which trades 50% of its share capital per day than an EUR100million market cap company that trades 5% of its share capital per day. I need something to happen, whether it’s good or bad. If it’s good, the value of my shares goes up and I’m going to earn more money. If it goes down, my model still allows me to earn money by converting. Essentially, we’re offering a cheap way to buy volatility. A flatlining stock does not work for us or our model”, says Vannineuse.
ABO has completed 47 deals in its slightly more than 2 years of existence, and deal flow comes from referrals, inbound enquiries, conferences and even old-school cold calling. The seemingly high number of completed deals isn’t high, however, because of the flexibility that the credit line offers the investee companies.
“Any company that’s well-managed should consider security a debt line with ABO”, says Vannineuse. “It’s a free option for them to get capital quickly when needed, and there is no obligation to draw on it. ABO's debt products provide SME listed companies with a security belt of sorts."
As an example of this, Vannineuse points to Patisserie Valerie, a London Alternative Investment Market listed SME whose shares were suspended from trading in October 2018 on news of alleged accounting irregularities, eventually being bought out by private equity firm Causeway Capital Partners in February 2019. “Patisserie Valerie could have easily been saved if they had a line of credit from ABO. The short-term capital crunch and liquidity gap could have been plugged by ABO’s debt capital line which could have meant their survival”, he said.
Whilst ABO does deals in Canada (it benefits from the connections of one of its major investors for access to Canadian opportunities), it focuses on the European market, because of a lack of competition – see the Blue Ocean reference above – and because of what it considers to be a high level of domain knowledge.
“What we do can also be considered to be regulatory arbitrage”, says Vanineusse. "Each market is very specific and requires us to do a lot of research before we enter a market. Each financial authority and country has its own rules regarding public companies and the issuing/trading of its shares – even if the European Union has done much to harmonize laws governing the financial markets. This creates a natural barrier to entry for our competitors.”
Another competitive advantage for ABO, that is also a drawback, is the scalability problem in the markets ABO invests in. There are a limited number of public companies which are going to satisfy ABO’s share liquidity requirements while requiring external debt financing, while others may over time have the ability to fund their additional capital requirements from their own balance sheet. For this reason, ABO is seeking to establish new listed companies which it will provide debt financing to which in turn will be able to provide equity financing to other companies.
"We’re creating a listed company that will fund private companies that are pre-IPO investments. The idea is to make an “IPO factory”, with ABO having deal exclusivity with respect to such targets. This is something we have been working on for a couple of years now, and hope to launch in the near future", said Vanineusse.
The pipeline of potential deals won’t dry up anytime soon, however. Vannineuse believes that Alpha Blue Ocean has plenty of opportunity because of where they sit in the lending ecosystem and the lack of other options for small and mid-cap listed companies.
“We make money regardless of how the stock performs. We’re the financers of growth that the world desperately needs right now."
We’re the financial partners who do what the banks don’t do anymore; we provide lending to fund extreme growth”, says Vannineuse. “But we’re a lender that doesn’t rely on the need to believe in the growth story, as we turn a profit regardless of how the stock of our portfolio companies performs. We’re the financers of growth that the world desperately needs right now.”
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