Data Assets & Alpha Group: A special-situations approach to alpha, with Blantyre Capital’s Founder and CIO

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Eloise Goulder: How do you realize value?

Mubashir Mukadam: There are really three ways. The first is we like to buy with a significant margin of safety. The second is we get very involved in fixing the balance sheet. The third is we get very involved in fixing the operations.

Eloise: Goulder You have all of this flexibility, public markets, private markets, different parts of the cap structure, do you think of yourselves as private equity or private credit or a hedge fund in general?

Mubashir Mukadam: We see ourselves as a little bit of each. Special situations exist because there is a gap between traditional hedge funds, private credit and private equity. We take components of each.

Eloise Goulder: What issues do you tend to find companies have found and have fallen into that lead them to need your support?

Mubashir Mukadam: Over my career, it's been a combination of over-leverage, mismanagement, technological change, regulatory change. It can also be external shocks. For example, sudden interest rate movements or FX movements or a big dislocation, something like COVID. That can shock the economy, shock businesses. Therefore, they need a solution to help them through a temporary challenge. That's where we can come in.

Voiceover: Welcome to “Market Matters,” our markets podcast on “Making Sense,” the hub for J.P. Morgan Corporate & Investment Bank podcasts. In each episode of “Market Matters” we discuss the latest news and trends shaping markets today.

Eloise Goulder: Hi, I'm Eloise Goulder, head of the Data Assets and Alpha Group here at J.P. Morgan. Today I'm really delighted to be sitting down with Mubashir Mukadam, who is founder and CIO of Blantyre Capital, which is a special situations fund in the equity and the debt markets. Mubashir, thank you so much for joining me here today.

Mubashir Mukadam: Thank you for having me, Eloise. I'm really honoured to be a guest here today.

Eloise Goulder: I'm particularly excited to be in discussion with you, Mubashir, because the form of edge and the alpha that you're adopting in your fund seems to be so distinct, really, and at the opposite end of the spectrum from the systematic equity liquid public market hedge fund alphas which we so often discuss on this podcast series. Mubashir, could you start by introducing yourself and your background?

Mubashir Mukadam: Sure. I was born in India. I grew up in Malawi. I, wanted to continue my studies so I came to the UK to go to university. After university, I took the first offer that I could in the banking world. I started off in the back office of Bankers Trust. I stayed with Bankers Trust through the acquisition by Deutsche. Then I decided I wanted to go to business school. It was at business school that I first heard about the whole special situations world because Enron had broken down. That got me really fascinated in the whole world of deep value investing. I wanted to pursue that but I didn't really have any background in special situations investing. I wrote a research note on a distressed company and sent it to the head of research at Deutsche Bank. I kept calling him up until one day he picked up the call and I said, "Please don't hang up. Let me explain why I can do the job, although I've never done the job before." I took him through my research note and to his credit, he spent an hour and a half listening to me. Then he invited me to meet with the rest of the team, which I did. Then just to absolutely make sure that I got the job, I offered to work for free. They said, "Fine, we'll take you on." They took me on. I have to say, after a month or so, they did start paying me, I worked at Deutsche for about five years. Then I saw an opportunity to help build out York Capital's European credit business and move to the buy side. Whilst I was at York, I realized that I really enjoy the aspects of both public markets and private markets investing. And I was headhunted to KKR to build out their European special situations business, which I did. Then I decided I wanted to go out and build my own business.

Eloise Goulder: Wow. Well I'm so glad you went through those early years in your career, because in moving into special situations, it really shows your perseverance and your tenacity and your hunger to get involved and potentially to work for free. Fascinating to hear that. I'm sure that speaks to the passion and the hunger that you still have with you today.

Mubashir Mukadam: I think it's critical. If I think about that drive when I was building Blantyre, I spent two and a half years, I did about 814 investor meetings and calls just in order to launch the business. Without that tenacity, it's very difficult to get a business off the ground.

Eloise Goulder: Absolutely. What really drove you to want to set up your own business? You' had obviously had senior roles within both banking and private equity and an incredible background for special situations. What was it that made you want to set up your own company?

Mubashir Mukadam: There are two things. First, entrepreneurial, and second, size of business. If I take the first, I had that entrepreneurial bug. Having built three businesses for other people, two at KKR, one at York, having done over 100 deals, everything from distressed private equity to more fixed income, having invested with prop capital, hedge fund capital, private capital, I felt I had the right skillset to build a business and hopefully be successful at it. The second aspect of it was that I could see that a large part of our market was focused on trying to deploy greater amounts of capital, but I saw the inefficiencies were really in the mid-market because there are a lot of companies in the mid-market that required special situation solutions, but most of the capital was chasing the larger opportunities. In the mid-market, I saw there was a lot more opportunity, less competition and so I wanted to build a business that I felt was relevant to leverage that opportunity set.

Eloise Goulder: Brilliant. Can we dive into Blantyre Capital now? Can you tell me about your investment philosophy?

Mubashir Mukadam: What we do is we buy complexity and we sell simplicity. What does that mean? Oftentimes investors like perfectly performing businesses with nice growth trajectories and avoid assets or businesses that don't fall into that category. What happens as a result is there's a big air pocket for those businesses that don't fall into that category. We try and work within that air pocket.

Eloise Goulder: What do you mean by complexity?

Mubashir Mukadam: What we mean is either a broken process, a broken balance sheet or broken operations. Sometimes all three. We go in with a solution to try and fix those.

Eloise Goulder: And so how do you fix them? How do you realize that value?

Mubashir Mukadam: There are really three ways. The first is we like to buy with a significant margin of safety. There are two aspects to that which I'll come back to in a bit. The second is we get very involved in fixing the balance sheet. The third is we get very involved in fixing the operations. Coming back to number one, which is buying with a significant margin of safety, is simply said, we like to buy things cheap. If something's worth eight, we like to buy at four, five, six. The second aspect of that, which is equally important, is we like to be more senior in the capital structure. The reason for that is if there's a big dislocation, asset values drop. If you're more senior in the capital structure, you can protect value through that downturn. If you're more junior in the capital structure, there's a greater likelihood that you can get wiped out. Our whole philosophy is about capital preservation and ensuring we protect the capital that our investors have given us. So it's very important to be focused more senior in the capital structure.

Eloise Goulder: That makes sense. Do you invest in both public and private markets?

Mubashir Mukadam: Yes, we do. The way that we think about it is, are we getting compensated for taking that illiquidity premium? Just for example, pre-COVID, valuations were very rich in the public markets, we were very much focused on the private markets. Then when COVID hit, we stopped all private market activity because you could buy senior secure debt in the secondary market at very attractive multiples and very attractive yields.

Eloise Goulder: It's wonderful, I imagine, to have that flexibility across the cap structure from public to private markets so that you can really seize those opportunities as they arise.

Mubashir Mukadam: It is. Having the breadth of mandate, not only in terms of capital structure but also across different jurisdictions and similar to the way that we think about public and private, we think about, are we getting compensated for taking jurisdictional risk? One of the advantages of Europe is there's a number of different countries, a number of different jurisdictions which creates an opportunity to buy at differentiated valuations, which perhaps you don't have in the more homogenous US market.

Eloise Goulder: You have all of this flexibility, public markets, private markets, different parts of the cap structure, do you think of yourselves as private equity or private credit or a hedge fund in general?

Mubashir Mukadam: We see ourselves as a little bit of each. Special situations exist because there is a gap between traditional hedge funds, private credit and private equity. We take components of each. At the investment level, it may appear as either of the three depending on the characteristics of that investment.

Eloise Goulder: How many companies do you invest in? Are you long or do you go short as well? Can you tell me a bit about your portfolio?

Mubashir Mukadam: Generally, we're long only. In order to be effective in what we do, if you go back to our investment philosophy, which is we're buying with a significant margin of safety, we're getting very actively involved in fixing the balance sheet, fixing the operations, working with the stakeholders to be able to do that, we are active investors, but not activists. We will work with the other stakeholders in order to provide the best solution for that particular business. Because it's very human-intensive, we tend to be more concentrated. Typically, we're looking at 20 investments per fund, and on average, 5% to 7% positions, maximum 10% issuer level.

Eloise Goulder: Thank you for articulating all of that. Well, as I said at the beginning, it's so interesting and impressive to hear about a company like yours which is so active and so actively changing the business from within, across the operations, across the balance sheet, and also sourcing alpha from that margin of safety you mentioned in terms of the price at which you buy these assets. Very concentrated, very human-intensive. Active but not activist. It all sounds so contrasting, really, as I said at the outset, with the widely diversified public equity systematic hedge funds out there.

Mubashir Mukadam: Absolutely. In order to be able to do what we do, because of that greater human intervention, we're very analogue. It's very difficult to digitise what we do because of the significant human aspects of what we do and the emotions that we're dealing with around businesses that we're helping through challenging periods.

Eloise Goulder: Yes, it really does feel like the opposite end of the spectrum.  Can you give me any examples of the sort of situations you get involved in?

Mubashir Mukadam: Sure. One of our first investments was an investment in a company in Bulgaria. The company had meandered off of its original business and found that they had taken on too much debt. They ended up owing a lot of money to their suppliers, not being able to pay their debts when they were due. The first thing we did is we analysed the business. Was this a good business? We believed it was. We thought it was a good business, but it was a bad balance sheet. The second thing that we did is we analysed the legal framework, both in terms of the company and the capital structure and the debt instruments and the documentation that underpinned that debt, and also the jurisdictional issues. How easy is it for a creditor in Bulgaria? Once we got comfortable with that, we bought into the debt of that company. We took that company through both a balance sheet restructuring and an operational turnaround. We fixed all of the overdue suppliers. We paid them off. We resized the balance sheet. We brought in fresh management that helped turn around the business, and then ultimately we sold that business to a strategic.

Eloise Goulder: Fascinating. Can we turn now to the wider market and the competitive landscape? I'm fascinated to know whether many other players are in this space. You mentioned that you're concentrated in the mid-cap area. Is it a very competitive space? If it is attractive from an alpha perspective, why aren't more players there?

Mubashir Mukadam: It's a very good question. The way that we think about our skill set and how we create value, there are three levers. The first is the margin of safety, the second is fixing the balance sheet, the third is fixing the operations. A number of our competitors will say they do one, i.e. buying with a margin of safety. There are fewer that do one and two, margin of safety and fixing the balance sheet. There are very few that do one, two and three, which includes the operational turnaround. That technology is something that we've borrowed from what we've observed on the private equity side, where you have operational turnaround teams that work with private equity portfolio companies to help them turn around. We've applied that technology and adapted it to the special situations world. There are very few competitors that combine those three elements. The other aspect of our competitive advantage is the duration of capital that we have and the breadth and the flexibility of our mandate which our investors have given us the privilege to work with. Our capital is much longer duration because we've got to see through both the balance sheet restructuring and the operational turnaround. On top of that, we've built an edge over two decades plus of sourcing differentiated investments. Just to give you a sense, since we've started the firm about eight years ago, we've originated over 12,000 opportunities. We've analysed 1,500 and we've made about 75 investments. It's really important for us to be able to have a wide origination funnel so that we can select the very best opportunities from a wide selection. That also helps us in differentiating ourselves.

Eloise Goulder: Well I'd love to get into that screening selection process that you mentioned, because that strikes me as an area where perhaps data and automation can play a greater role today or in the future. Before we go there, it's such an interesting space to be in. There's clearly edge and alpha to be had. Why do you think there aren't more players in this space?

Mubashir Mukadam: I think because it requires a level of expertise both around understanding business, but also a heavy legal background, both in terms of understanding the company-specific legal issues, but also the jurisdictional issues.

Eloise Goulder: Makes sense.

Mubashir Mukadam: The other element is that this is not a volume-driven business. For those asset management firms that want to scale their business, it's very difficult to scale this in the way that you can with some other asset classes.

Eloise Goulder: Hmmm… and does that mean that you yourselves are capacity-constrained in any way?

Mubashir Mukadam: We certainly think there's an optimal amount of capital that one should be working with at any given time. And, if I look at just over my career investing in special situations, a lot of the players have retrenched. If you think back to almost 20 years ago, the banks were a large part of the special situations market. Because of regulation, a lot of the banks have retrenched from the sector, so a big element of the competition has disappeared.

Eloise Goulder: That's very interesting. That bank retrenchment has really created a greater opportunity set for you.

Mubashir Mukadam: Absolutely, it has.

Eloise Goulder: And just before we turn to the current environment, I wanted to ask about the companies themselves that you are buying or taking a stake in. You mentioned that you're typically providing operational support or balance sheet support. What issues do you tend to find companies have found and have fallen into that lead them to need your support?

Mubashir Mukadam: Certainly there's some that are company-led, but there are also some that are macro-led. Over my career, it's been a combination of over-leverage, mismanagement, technological change, regulatory change. It can also be external shocks. For example, sudden interest rate movements or FX movements or a big dislocation, something like COVID. That can shock the economy, shock businesses. Therefore, they need a solution to help them through a temporary challenge. That's where we can come in.

Eloise Goulder: Hmmm… makes sense. That's a great segue into the current environment, the current macro environment. Obviously, here in Europe, growth has been very stagnant, improving a little bit, I think, but pretty stagnant over the last couple of years. Interest rates, on the other hand, have risen and are high. What sort of setup does that present you with? Is this a good opportunity set for you? How do you think about the current environment?

Mubashir Mukadam: Given our strategy is an evergreen one, there are always opportunities irrespective of the market environment. To your point, though, today the opportunity set has grown massively, and that's driven really by four things. One, the rapid increase in rates. Two, the inflation and the fact that whilst headline inflation has come down, a lot of companies are unable to pass those costs on to the consumer, and that's impacting their ability to generate profits. The third is the consumer is struggling with energy bills that have gone up so high in Europe, with mortgage rates that have gone up. It's become very difficult. The fourth is the debanking that's been going on. As a result, the opportunity set has certainly increased, and the way that we're dealing with it is we've increased our expected rate of return for this type of environment just so that we can filter out more opportunities. I want to pick up on something that you mentioned about growth. Because of the way that we look at investments and the way that we make investments where it's largely predicated on buying with a very significant margin of safety and being active in fixing the balance sheet or fixing the operations and sometimes all three, we tend to rely less on economic growth to deliver our returns than perhaps some other strategies.

Eloise Goulder: Of course. Everything you've just mentioned in terms of the macro is quite Europe-specific, particularly when it comes to the stagnant growth. Am I right in assuming that your investments tend to be heavily Europe-biased? If so, why?

Mubashir Mukadam: The vast majority of what we do is in Europe. We have the mandate to be able to do investments outside of Europe. The reality is we're seeing a lot more opportunities in Europe today than we have in the past. Part of that is driven by the fact that the economies in Europe, a lot of them are not doing well. Also, If you think about the drivers of inflation, that has impacted Europe to a much greater extent than some of the other economies elsewhere in the world.

Eloise Goulder: It's so interesting because, again, there's a real contrast here between your investment opportunity set, which is biased towards Europe for all of these reasons and presumably valuations more attractive here in Europe. Whereas if we're speaking with a publicly listed equity liquid hedge fund, they will typically see the vast majority of the investment opportunities in the US where the markets are far more liquid and there are far more growth opportunities, arguably, in the US. Fascinating, again, to hear the differences between your strategy and others.

 Mubashir Mukadam: I think that's right. I also think that because Europe is a number of different countries, you've got a number of jurisdictional issues. You've got smaller markets. You've got language barriers. You've got cultural barriers. People see that as a problem. We see that as an opportunity because if one can navigate the different jurisdictions, the different cultures, the different language barriers, and if one has set up the team as we have to navigate all of those, it creates a very rich environment to originate deals in a differentiated form than the big liquid markets.

Eloise Goulder: So interesting. Absolutely makes sense that that should be exactly part of your edge, part of your alpha, part of the opportunity set.  Finally, I wanted to turn to the future and also to data. You've mentioned how much the specialised human is required in your business and that skill is really part of your edge But -what about data? I always ask our investment professional guests how they leverage data in the investment process and perhaps how they leverage AI in the investment process. How do you think about that?

Mubashir Mukadam: We're always looking to improve our processes. If I think of our origination, we certainly use proprietary screening tools to identify opportunities…And if I think back to 25 years ago when I started out, we do our traded and transaction comparables by hand. Today, with a couple of clicks on Capital IQ, you can have a very good data set and comp set. I think those improvements will certainly make us more efficient, but it can't replace the human intervention of the sourcing, the negotiation, the emotions that get involved when we're helping businesses through challenging times.

Eloise Goulder: Hmmm.. Final question for you then, Mubashir, what's next? What does the future hold? Is it more of the same? It sounds like you've got a really attractive and well-honed machine already. Is it more of the same or are there changes coming up over the coming years?

Mubashir Mukadam: We think the current environment is going to continue for a number of years because the impact of low growth, high interest rates is going to continue. Even after that, we're very excited for our business model because if you look over the last 30 years, the credit markets have continued growing year after year. The reality is those economic cycles will continue happening. Those business issues will continue happening. It's just human nature that companies get into trouble from over-leverage, mismanagement. So our opportunity set is going to continue to grow, we believe.

Eloise Goulder: Yes, it sounds like these are very entrenched issues that are here to stay in certain pockets of the markets. Thank you so much, Mubashir. This has been such an insightful discussion and it's really fascinating to dig into your edge, your alpha, which in my mind is so distinct, as I've said, from the alpha that we see in public liquid markets. In general, as you say, your world is more human-intensive, perhaps more analogue, perhaps less ripe for automation and AI and the technological shifts that we're seeing elsewhere. As you say, pockets are evolving in the screening process, for example, and that will be really fascinating to watch as well. Thank you so much, Mubashir, for taking the time to speak with us today.

Mubashir Mukadam: Thank you very much, Eloise. It's been a pleasure being here.

Eloise Goulder: Brilliant. Thank you also to our listeners for tuning into this bi-weekly podcast series from our group…If you’d like to know more about Blantyre Capital then please do take a look at the links in the show notes. Otherwise, if you have feedback or if you’d like to get in touch with our team, then please do go to our website at jpmorgan.com/market-data-intelligence – and there you can always reach out via the ‘contact us’ form. And with that, we’ll close. Thank you.

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