Edwin Wong and the Zen of special situations

First, the back-story. It is September 15, 2008, the Monday morning after Lehman Brothers goes bankrupt. The bank’s Hong Kong offices are practically empty, the staff enjoying a well-earned (or undeserved) lie-in.

But the desks of the special-situations team remain occupied. That team is run by Edwin Wong, who has risen swiftly through the Lehman ranks from vice-president in the late 1990s up to senior managing director, running the special-situations unit, which manages $2 billion, as well as being in charge of flow business.

They all come into work unpaid, because they know their projects haven’t disappeared and, if neglected, might lose some of their special sheen, even if Lehman is now buried at a crossroads with a silver stake through its heart.

This continues for a few weeks until the ‘Jesse Bhattal trade’ is done, with the former Asia-Pacific CEO moving all the Lehman staff in the region to Nomura (including, literally, the tea lady). 

So, the SS boys’ work had to stop. Nomura only got the people, not the special situations. The deals went to the liquidator. Nomura didn’t want to do these kinds of trades, preferring to conduct a flow business, and the Japanese bank could not offer the kind of balance-sheet width that Lehman had.

In due course, Wong’s team left Nomura in its entirety and last year set up Hong Kong-based SSG Capital Management, an acronym for Special Situations Group, their former corporate name. All the founders got some shares and, in keeping with their game spirit, nobody got paid for the first few months. 

They have raised $250 million in a fund and a segregated managed account from a wealthy family to invest in special situations. There is no seeder money, as the team wanted to retain the equity.

The fund targets annual returns of 25%-plus. It has a five-year lockup, though expects to return money to investors by year three. There is a 2% performance/20% management fee structure. No performance fee is payable until capital plus an 8% return is repaid.

SSG hopes to raise another $100 million before closing the fund at the end of the year. However, new investors entering now may have to pay more for their shares, because the underlying situations have been marked up since launch. Not necessarily the Lehman-owned situations that this team once managed, though. If they want to retrieve those positions, they'll need to speak to the Lehman liquidators.

So what is SSG trying to accomplish, and what’s the special touch?

“We look for situations where we can drive the restructuring,” says Wong, chief investment officer and managing partner. “And before we invest, we have figured out exactly how we’re going to drive it. At the point of investment, what we plan to do has been discussed with – and is likely to be fully endorsed by – the stakeholder. Special situations are not really a mysterious black box.”

Roughly half the portfolio comprises deals in default, and the rest are special situations. That means no default is involved, but shareholders might be at loggerheads and want to split up, or a lender may wish to get out. Entry for SSG is mostly via the debt side, but with equity upside and usually collateralised.

Specialising in natural resources, shipping and retail, the firm is largely self-originating deals and finding private deals in China, India and Indonesia. They sometimes use local partners, but for the most part, find deals through their own list of contacts, such as tycoons. They are not particularly active users of steers from the Wall Street bank desks, and SSG remains a very Asian operation throughout.

“We’re in synch with the deal flows and businessmen,” says Wong. “Many LPs can give us a strategic edge. We can’t use their name to market ourselves, but some will talk to investors carrying out due diligence.

“In Asia, we might not have the deeper pool of distress that the US has, nor their established systems for resolution, like Chapter 11 procedures,” he adds. “But funds that can play the game right can make a fortune here.”

Apart from missing the first-class air travel, Wong and his team are happy to have their own firm. When they left Wall Street, they were in demand, and the question of whether they would ever go back to the big show is a scenario they’ve been presented with and had to decide on.

However, they’re going solo, and thinking about getting value for their equity in the next few years by putting out more SSG offerings, including local-currency funds in selected Asian countries.