Special situations fund

Quick facts

Special situations; are unusual or one-off events (including rumours and news stories) that mean the market is less able to value a business properly. These events include spin-offs, mergers, bankruptcy, litigation, succession or shareholder action. Special situations funds are equity funds that look to exploit these events by buying equity in these businesses. 
Special situations funds come under the banner of private debt funds – your investors (e.g. hedge funds, private equity companies and other intuitional investors) will usually take a controlling stake in your business.

Special situations funds are considered by some to be the ultimate in ‘active’ investment and have come to be associated with a handful of star stock pickers – as a result they can be more marketing badge than a meaningful descriptor.

If you find yourself on the verge of bankruptcy, you might be forced to sell your debt obligations (as bonds) at a large discount. The buyer (investor) will usually end up controlling your business if you survive bankruptcy. The debt will then no longer be distressed and will therefore be valued at a much higher price.

A special situation does not necessarily forecast bad news for your business! It could be that rumours of a buy-out of another company might drive the value of the parent company up. Also, mergers and acquisitions could trigger event driven valuation fluctuations. There are investment funds dedicated to tapping into potential growth in this sector.

Private debt – Private debt is an umbrella term that refers to debt products that are financed by non-bank institutions. Unlike publicly listed corporate bonds, private debt products are usually illiquid and not issued or traded on public markets. Private debt (also known as private credit). In a ‘special situation’, i.e. if your business is going through a significant change (or you are facing bankruptcy) you may welcome an approach from a special situations financed by private debt
Debt financing – Debt financing is a broad term that covers any type of loan that you pay back, with interest, over a set period of time. A loan can come either from a lender – see business loans – or from selling bonds to the public. If your business needs to raise money (capital) you can either borrow from a lender (i.e. debt financing) 

Equity financing – Equity finance refers to the capital an external investor injects into your business in return for a share of ownership (equity) and/or some control of the business. Equity finance investors therefore have a claim on your future earnings but, in contrast to a loan, you don’t pay any interest – nor do you have to repay capital. If you opt for equity financing, you’ll sell a stake in your business in return for funds.

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