In the third quarter of 2025, the broader credit markets exhibited resilience, yet Pzena Investment Management's portfolio experienced a 1% downturn. This decline was primarily attributed to the significant depreciation of First Brands' loans. The period was marked by ongoing volatility within the leveraged loan segment, where performance disparities were notable. Despite these challenges, the firm adhered to its disciplined investment philosophy, identifying opportunities amidst market dislocations.
The credit landscape in Q3 2025 continued to show overall robustness, underscoring a generally positive environment for credit investments. However, the leveraged loan market presented a more complex picture, characterized by varied performance across different assets. This divergence created both hurdles and selective opportunities for active managers like Pzena, necessitating a keen focus on fundamental analysis to discern value.
A notable event in September was the emergence of market anxiety regarding a potential uptick in default rates. This sentiment was fueled by high-profile Chapter 11 filings, including those by Tricolor and First Brands. Such developments often trigger broader market reactions, irrespective of individual company fundamentals, leading to periods of heightened caution among investors and influencing asset valuations.
First Brands' sudden entry into Chapter 11 was precipitated by a combination of factors, including an accounting review and a short position taken by Apollo. These events collectively induced what can be described as a 'run on the bank,' forcing the company into bankruptcy within a short timeframe. This rapid escalation of events created a significant challenge for holders of First Brands' debt, including Pzena Investment Management.
Despite the adverse market reaction and the Chapter 11 filing, Pzena Investment Management maintained its conviction in First Brands' underlying business strength. The firm viewed the market's response as excessive and an overreaction to temporary issues rather than a reflection of long-term solvency. Consequently, Pzena strategically leveraged this period of distress to augment its existing positions in First Brands' loans, acquiring additional stakes at significantly reduced valuations.
Pzena's investment strategy is founded on a principle of identifying and acquiring sound businesses at undervalued prices. The firm conducts exhaustive fundamental research to differentiate between transient operational setbacks and irreversible structural issues. This rigorous approach guides their decisions, allowing them to capitalize on market inefficiencies where assets are mispriced relative to their intrinsic worth.
The third quarter of 2025 demonstrated the critical importance of a deep value investing approach in navigating dynamic credit markets. While short-term events can create significant price fluctuations and market anxieties, Pzena's adherence to its core philosophy enabled it to identify and act on perceived mispricings. This quarter's experience with First Brands underscores the firm's willingness to take contrarian positions when its analysis suggests a disconnect between market perception and underlying value, aiming for long-term outperformance by investing in fundamentally strong companies at attractive valuations.
