What Is a Special Situation?
A special situation refers to particular circumstances involving a security that would compel investors to buy the security based on the special situation, rather than the underlying fundamentals of the security or some other investment rationale. This type of investment is an attempt to profit from a potential rise in valuation that the special situation presents. There could be a near-term catalyst to quickly gain from the resolution of a special situation, or it could take many months or years.
Special Situation Explained
Special situation investment opportunities can take many forms and involve multiple asset classes. Typical special situations can arise from spinoffs, tender offers, mergers and acquisitions, bankruptcy or distress, litigation, capital structure dislocations, activism, or just complexity that the market does not understand.
Special situation investments are most visible with equities, but behind the scenes, sophisticated investors analyze senior and subordinated debt securities to look for mispricings to take advantage of, or engage in private placements (non-public investments) in a distressed company. A special situation can surface in any industry during any point of an economic cycle.
Investment funds that are dedicated to special situations usually have "Event Driven" or "Opportunistic" in the names of the funds.
Example of a Special Situation
An example of a common special situation would be a large public company spinning off one of its smaller business units into its own public company. If the market deems the soon-to-be-spun-off company to have a higher valuation in its present form than it will after the spinoff, an investor might buy shares in the larger company before the spinoff in an attempt to realize a quick price increase.