Special Situation (Event) Investing

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What is a 'Special Situation' Investing?

You may or may not hear about this before but below shall give you some clue or a clearer definition :

Time to explain: From Wikipedia :

A special situation in finance is an event turning business to go not as usual and materially impact a company's value. The notion covers restructuring of a company and corporate transactions such as spin-offs, share repurchases, security issuance/repurchase, asset sales, or other catalyst-oriented situations. A conflict of shareholders is also considered a special situation.
To take advantage of special situations, a hedge fund manager must identify an upcoming event that will increase or decrease the value of the company's equity and equity-related instruments.

Generally, the special situations investing is considered to be a subclass of alternative investments. Special situations are very risky and challenging as businesses go not as usual. 

They require specialized expertise; determining the best price can be difficult. In addition, profits are far from assured, because prices might increase as more money chases deals. 

Therefore, such situations are monitored and sought after by hedge funds, for they provide interesting investments opportunities. Private equity funds and other institutional investors also do special situation investments as part of their strategies.

From Investopedia :

A special situation refers to particular circumstances involving security that would compel investors to trade the security based on the special situation, rather than the underlying fundamentals of the security or some other investment rationale. An investment made due to a special situation is typically an attempt to profit from a change in valuation as a result of the special situation, and is generally not a long-term investment.

A good example of a special situation that would prompt investors' attention would be a large public company spinning off one of its smaller business units into its own public company. If the market deems the soon-to-be-spun-off company to have a higher valuation in its present form than it will after the spinoff, an investor might buy shares in the larger company before the spinoff in an attempt to realize a quick price increase.

There are many other circumstances that could be referred to as special situation investment opportunities such as tender offers, mergers and acquisitions, and bankruptcy proceedings.

Special situation investing is not something new. Benjamin Graham and David L. Dodd addressed its merits in their famous work Security Analysis.

QuoteFirst, just what is meant by a “special situation”?Convention has not jelled sufficiently to permit a clear-cut and final definition. In the broader sense, a special situation is one in which a particular development is counted upon to yield a satisfactory profit in the security even though the general market does not advance. In the narrow sense, you do not have a real “special situation” unless the particular development is already underway.Unquote

As above mentioned, investors try to take advantage of certain issues which may affect the valuation of the underlying stock in the short term, such as pending court order on certain dispute, Merger and Acquisition, hostile take over, short seller’s attack (like the case of Muddy Water on Nobel Group and the recent one “ Huishan Diary “ ), governance or restructuring , shareholders activism etc.

Renowned local financial blogger SG ThumbTack Investor (aka TTI ) have a very good blog post with regards to this kind of “special event investing “ on his personal encounter. It is about the action taken by a private equity firm  (POPE Asset Management ) on Kingboard Copper Foil Holding Ltd in related to the company’s valuation (a high cash-rich company ). The PE firm try to take court action to “ unlock “ the value of the company as the company is having HKG124 Mil in total liabilities vs cash of HKG 1.56 billion….

You may read the full and interesting write up here (click ).

I think the recent story of Quarz Capital Management vs Metro Holding ( which is also holding much of cash in hand ), may have more connected to local investment sphere or investors.

The full story from The Straits Time Business (here )

My Experience on Sabana Reit

I am not so sure if this can be a case for “special situations investing “, where I have invested 90 lots of Sabana Reit after the share price tumble to historical low after the company’s right issues to acquire more asset. This follows by minority shareholders action on requesting an EGM to boot out the “Reit Manager “  due to poor management and performance. The saga continues ….

You may refer to my purchase of Sabana Reit ( here ) and my thought on the possibility of “ Principal-Agent Problem or Conflict “ on Sanaba (here ).

Such investment of slightly more than 3 months improve my XIRR by 1.2% point ( from 9.2% to 10.4% ) and gave me a profit of $13,399.87 (including dividend collected in 1st Qtr 2017 ).  As I have explained in my previous post, the fundamental does not change and I am not going to hold this for long term as poor manager’s performance and the issue of valuation of a new asset to be acquired remain unchanged.

As mentioned earlier, sometimes the result may not turn out to be in our favour and we may end up poorer when the event unfolds eventually.

Do you have any story on “ special situation investing “  to share? and what is the outcome of such investment at the end of the day? 


Quote Of The Day :

“There’s only one reason a share goes to a bargain price: Because other people are selling. There is no other reason. To get a bargain price, you’ve got to look for where the public is most frightened and pessimistic.” By John Templeton


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