Should You Invest in Special Situations?

Should You Invest in Special Situations? Special situations are changes or developments that have the potential to have a significant impact on a company's financial performance. Capital restructuring, mergers and acquisitions, ownership changes, new technologies, new legislation, and big disruptive events such as COVID-19 are examples of these trends. These unique circumstances can result in considerable re-ratings of valuations and higher returns for investors. Identifying unique situations as investment possibilities necessitates a high level of financial knowledge. For investors who seek to profit from unusual situations, thematic equity mutual funds investing in them can be a good option.

Investing in turnaround opportunities

Special situation funds have traditionally invested in distressed enterprises (e.g., corporations approaching bankruptcy) with the ability to turn around following capital and management reorganisation. Special circumstances funds buy these firms at low valuations in the hopes of profiting from the valuation upside when they turn around, generating alpha for investors. Investors should keep in mind that not all companies in financial difficulties will be able to recover. Special situation fund managers are skilled at spotting failing businesses with sound business models that can be turned around and profitable.

Investing in mergers, acquisitions and divestitures

Through synergies or unlocking value, mergers, acquisitions, and divestitures can create value for shareholders and investors. A firm can gain a significant amount of market share, strengthen its pricing power, uncover cost-cutting possibilities, and improve its operating margins and profitability through mergers and acquisitions. Firms can unlock wealth for shareholders through divestitures (selling shares of subsidiary companies) if the value of the subsidiary and parent company individually is greater than the total worth of the company. Mergers, acquisitions, and divestitures do not always result in increased shareholder value. Special scenario funds seek out situations that provide value rather than detract from them.

Disruptive growth as special situations

Disruptive growth, in more modern times, has been defined as a unique set of circumstances capable of completely altering a firm or industry sector. If we go back 10–15 years, we can see significant disruptions happening all around us, and the pattern is just getting worse. Industry landscapes are undergoing revolutionary shifts as a result of disruption brought by technology and changing consumer needs. Investing early in companies that are expected to benefit from disruptive growth can yield higher profits.

Examples of disruptive growth

Access to data at a reasonable price Customers can get high-speed internet at a reasonable price thanks to 4G technology in telecom. This has changed the way we interact with one another and utilise our phones. In the previous five years, the number of smartphone users in India has nearly tripled (source: Statista). People use their phones for several reasons, including entertainment, shopping, banking, booking cabs, ordering meals, and gaming. Data demand will continue to rise in the future as consumption grows. Mobile app-based cab booking, including ride-sharing The way we commute has been revolutionised by app-based cab booking and ride-sharing. This upheaval has touched not only traditional taxi drivers but also has the potential to change the transportation industry. Online food delivery You can get food delivered to our house from your favourite restaurant using your smartphone app. In large cities, online food delivery is quite popular, and with the changing demographics of our workforce, we should expect this trend to continue. Online shopping and e-commerce Over the last few years, e-commerce and internet buying have exploded in popularity. People's use of the internet for purchasing has increased as a result of COVID-19. Another disruptive driver is the use of digital platforms to connect disorganised retail to customers. OTT platforms in media and entertainment Due to information being supplied straight to our homes via broadband internet, the media and entertainment sector is undergoing a huge upheaval. Digital payments The demonetization of currency created a significant incentive for digital payments. Through UPI and the JAM (Jan Dhan, Aadhaar, and Mobile) Trinity, the government is committed to digitising payments. The usage of digital payments has increased as a result of COVID-19.

Should you invest in special situations now?

Many businesses have been severely impacted by COVID-19. It has also paved the way for mergers and acquisitions in a variety of industries. COVID-19 has the potential to transform the dynamics of several industries in the medium to long term. Investing in firms and sectors that profit from changing dynamics can pay off handsomely. In the current environment, companies that are at the forefront of disruptive innovation or are better positioned to capitalise on growth prospects can be excellent investment opportunities.