Dan Zwirn, CEO of the global investor Arena Investors, thought markets were overvalued for at least five years before COVID, and he positioned Arena accordingly into diversified deep value investments. This strategy worked well when COVID hit. While many sectors tanked, there was only a “small impact” on Arena’s portfolio, Zwirn wrote in an investor letter. This allowed Arena to then quickly go on the offensive in looking for newly-created opportunities.
Arena’s portfolio generated positive results in 60 of the 63 months between its inception in 2015 and the end of 2020. But while COVID’s effects did create opportunities, Zwirn says he is still highly cautious because the level of capital in many COVID-era deals clearly assumes the beneficiaries’ troubles will be temporary. Zwirn does not share that assumption—and in any case, he does not structure his deals around such assumptions.
Arena practices a deeper-value form of investing. For example, Zwirn noted, if Arena were to lend against a cruise ship, success would not hinge on any particular rebound in tourism or level of cruise line market share—it would be tied to the underlying value of the ship itself being scrapped.
Arena uses a combination of such tough standards on the front end and the right structure, including short duration, seniority in the capital structure, and protective covenants. The aim is to make Arena essentially “indifferent between being repaid or taking control of the asset,” Zwirn wrote—so that predictions about highly unpredictable factors do not play a role.