We believe non-investment grade, mid-market capitalization companies exist in an inefficient area of the market sector often overlooked by market participants. Such companies provide DDJ Capital Management with a fertile source of investment opportunities.
DDJ believes that certain segments of the high yield and leveraged loan markets, namely lower rated securities (B rated or below) and middle-market issuers, are often misunderstood and/or overlooked by many investors and therefore are markedly inefficient. For example, many traditional managers of large-cap high yield portfolios, which may have large minimum investment size criteria as well as more rigid investment guidelines, do not find it cost-effective to dedicate sufficient resources to cover the middle market segment, which DDJ believes to be less frequently traded and offers smaller investment sizes. Furthermore, this segment accordingly is not as widely covered by high yield research analysts, and fewer brokers make a market trading in its securities. DDJ seeks to identify and exploit inefficiencies that arise as a result of such circumstances by adhering to a disciplined fundamental-oriented investment process and applying value investing principles to the credit markets through exhaustive financial and legal analysis.
DDJ believes that successfully uncovering these opportunities requires financial and credit expertise, extensive portfolio management experience and keen legal skills. DDJ calls on all of these strengths in employing a bottom-up, fundamental-oriented investment approach.
By adhering to our investment philosophy, we that believe we are well-positioned to deliver attractive, risk-adjusted rates of return throughout various market cycles.
The DDJ research process is designed to generate compelling risk/return investment ideas in line with our investment strategies. Our goal is to identify companies that have a solid core business, a "reason to exist," and generate sufficient free cash flow to service their fixed income debt obligations.
Before choosing to invest in a company, our analysts will typically first perform extensive due diligence by seeking out information from various sources, including company filings as well as interviews with company management, customers, competitors and suppliers. We also typically:
- Evaluate a target company's capital structure along with the trading price and relative value of each obligation.
- Analyze key financial considerations, such as:
- Liquidity: A company's ability to service debt and other obligations over the short term;
- Free cash flow: A company's ability to service obligations over the long term; and
- Asset coverage: Overall asset value relative to liabilities, a critical measurement in gauging downside protection.
- Perform periodic industry reviews to better enable us to recognize the relative value of companies and their competition.
Through our exhaustive research process, we strive to assess both management's capabilities and the company's future prospects. We leverage our network and at appropriate times we engage in customized financing solutions for our portfolio companies.