Headline Private Equity Seizes Mispricing Chance to Bottom-Fish Convertible Bonds

Convertible bonds, which offer the flexibility to attack or defend, are attracting an increasing number of top-tier private equity firms to invest. Interviews with the Shanghai Securities News have revealed that since July, several leading quantitative and bond strategy private equity firms have bottom-fished in the convertible bond market, with some managers even launching new products specifically for investing in convertible bonds. Industry insiders believe that convertible bonds, as assets with both equity and debt characteristics, will see increased investment from various institutions as the market continues to expand. Moreover, with convertible bond valuations at the bottom of the range, many opportunities that have been unfairly punished are worth paying attention to.

Top-tier private equity firms are flocking to the convertible bond market. Since July, the convertible bond market has been experiencing fluctuations and adjustments, but many top-tier private equity firms are "buying more as the market falls."

"The decline provides a better opportunity to add to our positions," said a partner of a private equity firm in Beijing with assets under management of tens of billions, who admitted that despite the market's fluctuations since July, the company has been actively seizing opportunities to bottom-fish, with some unfairly punished targets showing very high cost-effectiveness.

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A person related to a top-tier quantitative private equity firm in Beijing revealed: "In August, when the decline in convertible bonds was more severe, the company increased its positions in some convertible bond targets."

Zhuge Hengzhong, fund manager at Zhurun Investment, also stated that the company strongly looks forward to the convertible bond market this year.

In fact, institutions' preference for convertible bonds has already been evident in the second quarter.

According to statistics from Private Equity Ranking Network, as of the end of June, products from 12 private equity firms with assets under management of over ten billion yuan appeared in the top ten holders' list of 93 convertible bonds, holding a total of 34.036.8 million convertible bonds with a combined market value of 3.459 billion yuan.

Specifically, both subjective and quantitative strategy private equity firms with assets under management of over ten billion yuan have laid out convertible bonds.

Data from Private Equity Ranking Network shows that as of the end of June, products from four quantitative private equity firms with assets under management of over ten billion yuan held a total of 282,400 convertible bonds with a combined market value of 35 million yuan; products from six subjective strategy private equity firms with assets under management of over ten billion yuan appeared in the top ten holders' list of 77 convertible bonds, with a combined market value of 3.334 billion yuan. Additionally, two private equity firms combining subjective and quantitative strategies held a total of 850,800 convertible bonds, with a combined market value of 90 million yuan.Convertible Bonds: Offensive and Defensive Strategies

"Billion-dollar private funds are actively deploying in convertible bonds, mainly because convertible bonds have two advantages," said a private equity researcher in Shanghai. On one hand, convertible bonds possess both debt and equity characteristics, making them an investment tool for institutions that can be both aggressive and defensive in a macro environment with significant uncertainty. On the other hand, the convertible bond market operates on a T+0 trading system, which offers flexibility and convenience in operations. Especially in recent years, the convertible bond market has expanded significantly, with larger price fluctuation ranges, attracting the attention of quantitative private funds to this opportunity.

Zhuge Hengzhong analyzed that, from the perspective of equity characteristics, after the previous adjustments, the probability of the stock market achieving mean reversion is continuously increasing. From the perspective of debt characteristics, about two-thirds of the convertible bonds on the market currently have a positive yield to maturity. Even if they cannot be converted into stocks, the bonds can still create positive returns for the portfolio after maturity and repayment. Additionally, key indicators such as the conversion premium rate percentile and yield to maturity all show that convertible bonds are currently in a bottom range, with many high-quality targets being significantly undervalued, and they are expected to achieve valuation repair as market sentiment improves.

Strengthening Credit Risk Assessment Becomes a Consensus

Regarding the specific "tactics" for subsequent convertible bond investments, several leading private funds have mentioned the need to cautiously identify credit risks.

"In the process of selecting bonds, in addition to paying attention to the indicators of the convertible bonds themselves, we pay more attention to the credit risk of the issuers. Therefore, around the new 'Nine National Articles' regarding the delisting of listed companies, we have increased the weight of the company's delisting factors in the model, such as absolute stock price, operating income, market value, etc., to strictly control the entry standards and exclude credit risks. At the same time, we also pay attention to the downward revision and redemption clauses of convertible bonds in a weak market, using these clauses to obtain returns," said the founder of a billion-dollar bond strategy private equity firm in Shanghai.

Tongwei Investment's Research Director, Feng Xiang, also believes that the research and selection of convertible bonds should focus on the quality of the company, paying close attention to the company's fundamentals, premium rates, and maturity redemption dates. At the same time, after the new "Nine National Articles" were released, the "zero default" historical record of convertible bonds was broken, and further attention to corporate credit risk is required. Subsequently, they will look for those targets that truly have investment value.

Youmeili Investment's General Manager, He Jinlong, emphasized the diversification of investments. He admitted that credit risk is an important reason for the recent significant fluctuations in the convertible bond market. When selecting targets, it is necessary to pay attention not only to the price, volatility, and premium rate of convertible bonds but also to consider diversification to reduce the risk of large fluctuations in the overall portfolio caused by individual bond disturbances.