As small cap stock pickers, we are always on the lookout for companies with idiosyncratic drivers. One area we found particularly attractive is the M&A and restructuring advisory industry. In fact, we informally call them the “Anti fragile” stocks, a term coined by Nassim Taleb. The M&A and restructuring industry doesn’t merely withstand shock and crisis but benefits from it.

Among the key players in the industry, two stand out as noteworthy investments for our portfolios: FTI Consulting and Houlihan Lokey. These firms possess significant expertise in navigating complex restructuring scenarios and have proven their mettle through their long term performance.

Unique franchises in uncertain markets

FTI Consulting boasts a comprehensive suite of restructuring consulting services, and is often characterized as a “turnaround consultant”. The company will assume management responsibilities for companies undergoing restructuring, including strategy work, providing guidance, and executing operational and cost saving initiatives throughout the process. The company’s financial profile is uniquely balanced, combining restructuring practice with offerings in mergers and acquisitions, antitrust, and forensic consulting. This diversified business model enables FTI Consulting to weather various market conditions effectively.

Houlihan Lokey, a leading financial advisor, has played a prominent role in countless major bankruptcy proceedings over the past three decades, including high-profile cases such as Enron and Lehman Brothers. The firm excels in negotiating on behalf of both debtors and creditors during bankruptcy proceedings, advocating for optimal outcomes. Houlihan Lokey’s comprehensive model is further fortified by its mid-market mergers and acquisitions advisory and financial valuation services, ensuring a balanced profile across different market conditions.

These companies have demonstrated their resilience by providing positive returns during periods of market meltdowns, such as the onset of the Covid crisis. Furthermore, their exposure to merger and acquisitions activities positions them for continued outperformance during strong market recoveries.

The current environment is uniquely beneficial to M&A and Restructuring advisors.

A trifecta of higher interest expenses, weakening underlying cashflow and looming maturities are affecting a wide swath of companies both public and private.

Higher interest rate expense

After a rapid rise in rates, the reverberations across the corporate realm become increasingly apparent. The sheer volume of outstanding debt, which is orders of magnitude greater than in previous periods, presents a global phenomenon that demands attention. From high-grade to high-yield debt, companies around the world are grappling with an unprecedented level of financial strain. Unlike the complex catalysts that precipitated the Great Financial Crisis, the primary cause this time is straightforward: higher interest costs.