Sr Portfolio Manager
As the market officially enters bear market territory, we strive to find companies that we see as a glimmering light at the end of the tunnel. In this week’s Silver Linings, Lions Bay Fund manager Justin Anis discusses a potential winner who may benefit from the current downturn.
Following the turmoil of the last few weeks, we thought it would be prudent to highlight the defensive characteristics of our largest portfolio investment, Houlihan Lokey (HLI).
Houlihan Lokey is a Los Angeles-based investment bank that specializes in mid-market M&A transactions, which accounts for the majority of their revenue during healthy economic environments. HLI’s Corporate Finance practice is very much the cyclical part of their business, but given the current economic environment, we would like to highlight their other core business: financial restructuring.
In addition to their pro-cyclical Corporate Finance practice, HLI benefits from a leading restructuring and bankruptcy practice. Houlihan Lokey is the number one global restructuring advisor and has advised on 12 of the 15 largest U.S. bankruptcies since 2000. Their practice boasts one of the deepest benches in the industry with 45 Managing Directors and a true global reach, advising in over 60 different countries since 2000.
As the company has only been public since 2015, we do not believe that Wall Street has had an opportunity to truly appreciate the earnings power of this business during a recession. We got a preview in 2017 when HLI was busy with energy restructurings following the oil price collapse in 2016. For fiscal 2017, which was reported in May 2017, HLI enjoyed a 44% increase in financial restructuring revenue to $307mm, almost matching their entire corporate finance revenue from fiscal 2016! Unfortunately, the coming default cycle will be much larger than the energy driven stress in 2016, as many businesses around the globe will be forced to restructure due to the economic fallout from this health crisis. Houlihan Lokey has talent and expertise to navigate such an environment profitably and gain share throughout.
The most important asset for an investment bank is its people and HLI’s Financial Restructuring practice serves a secondary benefit in that, it allows the firm to retain their corporate finance professionals during a downturn in cyclical M&A activity. During a recent meeting with CEO Scott Beiser in their LA offices, he spoke at a length the advantage of being able to retain their corporate finance professionals during a recession, as well as the benefits of their ability to collaborate with the Restructuring team when cyclical activity is slow. We will to continue to communicate with the Houlihan management team as this crisis unfolds to gain valuable insights that we can apply to the rest of our investment process.
We truly hope that everyone is staying safe and healthy during such this anxious time. Please don’t hesitate to reach out with questions, comments or concerns.