Why investing in special situations is a great idea

Special situations refer to changes or developments which can potentially have a large impact on the financial performance of a company. These developments may include capital restructuring, mergers and acquisitions, ownership change, new technology, new regulations, major disruptive events e.g. COVID-19 etc. These special situations can lead to significant valuation re-rating and superior returns for investors. Identifying special situations as investment opportunities requires considerable investment expertise. Thematic equity mutual funds investing in special situations can be investment options for investors who want to benefit from such situations.

Investing in turnaround opportunities

Historically, special situation funds invested in distressed companies (e.g. companies facing bankruptcy) which have the potential to turn around after capital and management restructuring. Special situations funds invest in these stocks at low valuations, with a view to capture the valuation upside when these companies turnaround creating alphas for investors. Investors should understand that, not all companies which are facing financial distress are likely to turnaround. Special situation fund managers have the expertise to identify distressed companies with fundamentally good business models which can be turned around and made profitable.

Investing in mergers, acquisitions and divestitures

Mergers, acquisitions and divestitures have the potential of creating values for shareholders / investors through synergies or unlocking value. Through merger and acquisition, a company can get a big chunk of market share and increase its pricing power, find cost reduction opportunities and improve its operating margins and profitability. Through divestitures (selling shares of subsidiary companies), companies can unlock value for shareholders if the sum of the value of the subsidiary and the parent company separately is more than what the company is valued at as a combined entity. Not all mergers, acquisitions and divestitures create value for shareholders. Special situation funds identify situations which are value accretive rather than value dilutive.

Disruptive growth as special situations

In more recent times, disruptive growth also acts as special situations with the potential of transforming a company or industry sector. If we look back at the last 10 – 15 years, we will see that major disruptions are taking place all around us and the trend is accelerating. Disruption caused by technology and changing consumer needs is leading to transformational shifts in industry landscapes. Investors can get superior returns by investing early in companies that are likely to benefit from disruptive growth.

Examples of disruptive growth

• Access to data at reasonable price: 4G technology in telecom is providing high speed data at reasonable price to customers. This has transformed the way we use mobile phones and how we connect with people. The number of smartphone users in India has nearly tripled in the last 5 years (source: Statista). People are also using phones for a variety of purposes e.g. entertainment, shopping, banking, booking cabs, ordering food, gaming etc. As usage expands, the demand for data will continue to grow in the future.


• Mobile app based cab booking, including ride sharing: App based cab booking and ride sharing has transformed the way we commute. This disruption has not only impacted the traditional taxi operators, it also has the potential of transforming the transportation industry.


• Online food delivery: You can get food from your restaurant of choice delivered to our home through your mobile app. Online food delivery is very popular in large cities and with the demographic shift taking place in our workforce, we can expect this trend to strengthen further.


• Online shopping and e-commerce. The adoption of e-commerce / online shopping has taken off in a big way over the last few years. COVID-19 has increased online adoption by people for their shopping needs. Connecting unorganized retail to customers through digital platforms can be another disruptive force.


• OTT platforms in media and entertainment. The media and entertainment industry is undergoing a major transformation due to content being delivered directly to our homes through broadband internet.


• Digital payments. Demonetization provided a major incentive for digital payments. The Government is committed to digitization of payments through UPI and JAM (Jan Dhan, Aadhaar and Mobile) Trinity. COVID-19 hasincreased digital payment adoption.

Why special situation investments can lead to superior returns?

• Financial markets are slow to recognize disruptive innovations


• The impact of the unanticipated change is often overlooked


• Exploit gap in market expectations and actual growth potential

Should you invest in special situations now?

COVID-19 has resulted in deep economic shock for many companies. It has also created opportunities for consolidations across several industry sectors. COVID-19 may also change the dynamics of several industry sectors in the medium to long term. Investing in companies and sectors which benefit from the changing dynamics can lead to good returns. Companies which are at the forefront of disruptive growth or which are better positioned to capitalize on growth opportunities can be attractive investment opportunities in the current scenario.

Who should invest in special situations?

• Investors who want superior returns on investment over sufficiently long investment tenure


• Investors with high risk appetites


• Investors with investment horizons of at least 5 years or longer

Investors should consult with their financial advisors is suitable for their investment needs