Arena’s Dan Zwirn sees tough times ahead and that’s fine


The market’s reaction to the 7.7% rise in consumer prices in October from a year earlier, up from 8.2% in September and lower than economists’ average estimate, suggested a state of more optimistic spirit among investors. The S&P 500 jumped 5.5% on the day to 3,956.37, its biggest one-day gain in more than two years, while the Nasdaq Composite jumped 7.4% to 11,114.15 . The Dow Jones Industrial Average rose 3.7% to 33,715.37.

That leaves Mr. Zwirn in familiar territory, on the bearish end of the market sentiment spectrum.

Mr Zwirn, who founded Arena in 2015, has warned for years that overly aggressive monetary and fiscal policy creates a financial house of cards. The bad turn in markets this year – with a spike in inflation triggering an aggressive cycle of rate hikes by central banks – hasn’t forced the company to revise its business strategy, he said.

Instead, “the environment aligned with my thinking,” Zwirn said.

That hardly makes him a Nostradamus, Mr Zwirn said. The arithmetic of how markets work simply made it inevitable that “totally unnecessary quantitative easing started in 2012” and accelerated in 2020, combined with “grossly irresponsible fiscal policy”, would result in an escalation of inflation, he said.

On this point, he argues, the markets would have been desperate to see a Republican sweep in the US midterm elections on Nov. 8, because the stalemate – with Republicans in charge of Congress and Democrat Joe Biden’s term in office presidency extending until January 2025 – would limit the potential for further “grotesquely excessive spending”. As of Nov. 11, a number of races remain too close to announce, but Republicans appear poised to at least regain control of the House of Representatives.

More broadly, investors looking for market-friendly policy pivots anytime soon may be disappointed, he said.

While some market participants are still hoping that “once the risk-free hits 4.5%, inflation will come back down…that’s absolutely not going to happen,” Zwirn said. “That ignores the fact that quantitative easing basically gives you another … 300 to 500 basis points of risk-free risk that needs to be settled,” he said.

The punchline? “I think there are a lot of lows to the upside from here.”

If the market outlook is bleak, however, the outlook for Arena’s private credit business is anything but.

Arena has eight business units – a North American company; immovable; structured finance; global capital markets; European illiquid; illiquid Asia-Pacific; natural resources; and secondary and liquidity solutions — and in each “there are exceptional things that we are pursuing” now, Zwirn said.

From a credit perspective, trillions of dollars have been invested in growth-oriented companies that have systematically sacrificed profitability to increase revenue in an effort to boost their valuations. It left those companies in a box when that growth didn’t show up, he said.

Now, with those capitalizations collapsing, a capital provider such as Arena can be “a beneficiary of[these companies’]desperation not to value their equity”, by presenting themselves as a ready-made very low value, with considerable potential to extract high yields, Zwirn said.

The opportunities Arena is now finding for all eight business units, ranging from “some kind of tactic to already in progress, then in progress,” have become much more plentiful over the past year, he said.

In many cases, it’s “a company, or an asset, or an area or a team that we’ve been following for years and we’re both saying, hey, I love you but nothing to do. And then it’s is like, they call us or we call them and we have to run, right? That’s it, we have to go,” he said.

Tactically, one example of the opportunities presented this year as equities quickly fell into bearish territory was convertible bonds.

When the “convert market kind of exploded” earlier this year, as stocks of major issuers such as tech companies led lower, “institutional owners of converts sold, but the same owners of stocks didn’t react as dramatically,” creating a free upside for investors who bought the convertible bonds as well as put options on the underlying stock, Zwirn said. “We did a lot of things,” he said.

The biggest opportunities ahead for Arena will be in the leveraged finance space, as new market math puts an end to financial buyers paying 13 times for a company eight times, Zwirn said. Similar opportunities will arise in mortgages and asset-backed securities, he said.

The whole game of “I over-lend…to too high a multiple, to fund a private equity buyer’s too high multiple acquisition is now over because it was completely dependent on access to funding which was itself dependent- even the issuance of secured loan bonds, which were themselves dependent on the immediate availability of AAAs and people willing to buy other people’s CLO equity at incredibly tight expected returns,” a- he declared.


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