Why did you decide to join Pictet after a career spent mostly with Anglo-Saxon firms?
I was attracted by Pictet’s reputation for excellent client service and emphasis on understanding the clients’ needs. Building such a reputation requires time and to me it could only be the result of a well-entrenched culture of responsibility. This is no doubt due to the partnership structure, which encourages long-term development over seeking short-term gains and makes the Group sensitive to the consequences of its decisions. Also, 60% of our investments in distressed debt are in Europe, which means Pictet’s European heritage is a good conversation opener. Let’s say it facilitates discussions with companies and helps to understand them better.
What is distressed debt?
Typically companies whose debt falls into the ‘distressed’ category are over levered, hold a high level of financial risk, and are sometimes on the verge of bankruptcy. More concretely; the bonds and loans of such companies would typically trade 10% above the risk-free rate* ( of U.S. Treasury bonds or German Bunds for example), have cash prices below US 80 cents and would often be rated CCC, or under, by rating agencies such as Standard & Poor’s, Moody’s or FitchRatings.
Distress can then follow several paths; some companies manage to reverse their fortune and recover. Others use legal procedures to reduce the debt burden to a more sustainable level and find new sources of financing. High risk/distressed companies are also very sensitive to financing conditions: at times of high liquidity, many low-rated companies are able to refinance their debt despite deteriorating credit metrics and vice versa. A wide range of scenarios is therefore possible, creating a fascinating and ever-changing investment opportunity set.
Distressed debt opportunities are per nature counter-cyclical. Opportunities increase as the economy slows, after periods with excessive quantities of low-quality debt issuance. Our goal is to identify undervalued companies with favourable long-term perspectives, which have the resources to reverse their fortune, a strategy which can generate attractive returns, irrespective of the market. Historically, this investment strategy has led to good returns, particularly during difficult market conditions, as was the case in 2020.
To successfully achieve this, you need significant resources for thorough due diligence, each debt security must be analyzed and its position assessed in the bond issuer’s capital structure together with the recovery capacity of the bond issuer. This usually limits the number of potential investors to institutional investors with sophisticated risk management resources, such as hedge funds, private equity firms, asset managers or investment banks.
The United States has the most developed market for distressed securities but the international market, especially Europe, where we concentrate most of our investments, has become more active in recent years. This is due to more stringent banking capital standards and the increase of leveraged lending amounts. The multi-jurisdictional nature of Europe presents further opportunities for those practitioners with the experience to navigate across and within its legal frameworks.
Why is this a promising asset class, and particularly in a post-pandemic environment?
As an asset class, distressed debt displays some of the most pronounced mispricing, particularly within fixed income, and we believe understanding and capitalising on this can generate significant, uncorrelated investment performance.
With USD 1.5 trillion in 2021, the high yield junk bond market offers huge investment potential and has grown by 20% from its USD 1.2 trillion pre-Covid 19 levels. In Europe alone, the asset class grew from EUR 300 billion before the pandemic to almost EUR 400 billion today. The global economic downturn triggered by the pandemic has led to massive technological and structural changes, severely impacting a number of sectors, such as fossil energy producers, transport, hospitality and retail businesses. The Covid-19 driven recession has led to higher default rates in 2020 of nearly 5% in Europe and 11% in the United States, due to the heavy impact on energy companies. Default rates dipped in 2021, but the gradual normalisation of monetary policies and pullback of government support expected later this year is likely to confront a number of heavily indebted companies with increasing solvency problems, even though interest rates are still at a historically low level.
Distressed debt and special situations also exhibit a low correlation to other asset classes such as equity or traditional bond markets and can therefore temper return volatility; preserving capital and reducing the risks of a larger investment portfolio, all of which matter to investors.
What are PAM’s ambitions in this field?
Our team’s ambition is to create a robust and successful distressed debt franchise for PAM, which ties in with the long-term goal of our fixed income business of being a capital structure pioneer. Performance as always comes first, helping us to maintain strong relationships with our investors, predominantly institutional clients, HNWIs, family offices, endowments and Sovereign Wealth Funds, just as we did before we joined Pictet two years ago.
We believe we have the resources and potential to reach EUR 1 billion of assets in the next 2 to 3 years. Our ambitions are reflected by the recent launch in Q2 of a Cayman-domiciled fund and later this year a dedicated QDLP (NB: Qualified Domestic Limited Partner) vehicle for investors in China, extending the availability of our strategy more broadly to Pictet’s global client base.
Galia Velimukhametova joined Pictet Asset Management in February 2019 from Man GLG as a senior investment manager, responsible for the Distressed Debt and Special Situations team within Total Return Fixed Income. She came to Pictet with her team of three investment managers, Till Heimlich, Ide Kearney, and Vasant Mehta. Since January 2020, they have been managing the Pictet Alt - Distressed & Special Situations fund, with a cumulative gross performance to-date of over 65 % and EUR 320m of assets.
Galia was a Distressed Debt portfolio manager at Man GLG from 2008 to 2018, focusing on European stressed high yield corporates and distressed debt credit, managing a fund close to EUR 1bn assets at the time of her leaving. Previously, she was a managing director, partner and member of the investment committee responsible for investment selection and portfolio composition at King Street Capital, Europe. Galia also spent time as a debt/equity and capital structure arbitrage trader at JP Morgan.
Born in Almaty, Kazakhstan, where she grew up, Galia holds an MBA from Washington University in Saint-Louis, Missouri, and a Honours Degree in Economics from Moscow State University.
In your private life, you are an enthusiastic tennis player and passionate about arts, being a member of the Royal Academy of Arts. You are also known to be an avid reader on a wide range of topics. Which book inspired you most recently?
I am fascinated by history, especially the history of Russia and Central Asia where I am from. I have read a couple of amazing books on the subject recently. The first one is “The Romanovs” by Simon Sebag Montefiore, which depicts the tragic history of the Russian Imperial dynasty and is very well written and captivating. The second is “A New History of The World” by historian Peter Frankopane, in which he challenges our (Euro-centric) view that Europe was the cradle and the centre of ancient civilisations.
An artist whom you particularly admire?
This is a tough one! I remember spending days in the Belvedere Museum in Vienna, captivated by Gustav Klimt’s paintings. I also admire the scientific and mysterious beauty of Vasiliy Kandinsky’s art and try to go to all his exhibitions whenever possible.
Is there a personality who served as a model to you in life and why?
My parents have contributed largely to make me who I am and I am grateful for their love, support and acceptance. They both grew up during World War Two and had a difficult start in life but have achieved a lot through hard work and perseverance.