DG Capital’s Value Funds generated a return of -3.8% for the first quarter of 2026, with equity investments accounting for 86% of the performance and credit accounting for the other 14%.
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The firm’s Legacy Class did much better in April, returning 6.83% net for the month to bring its year-to-date return to 2.83% net. Class C generated a return of 9.9% net for April to bring its year-to-date results to 3.49% net.
Improved April returns
For April, DG Capital saw robust contributions from its middle-market debt and event-driven equities linked to corporate events and restructurings. Positive contributors during April included debt holdings in Macy’s (NYSE: M), Riot Platforms (NASDAQ: RIOT) and other securities detailed below.
Iran conflict takes a bite out of DG
Returning to the Q1 results, DG Capital cited the Iran war for its weak numbers, noting that the war triggered turbulence in the capital markets. Further, the U.S. appeals court reversed Burford Capital’s (NYSE: BUR) legal victory in Argentina, a major blow for Burford that turned it into a significant detractor for DG.
Nonetheless, DG’s Dov Gertzulin said in his Q1 2026 letter to investors, which was obtained by Hedge Fund Alpha, that the underlying portfolio fundamentals are still “exceptionally positive.” He noted that the majority of their investments keep posting robust earnings results and sizable amounts of free cash flow.
The events Gertzulin has been targeting have been happening. These include restructuring and bankruptcy emergence, refinancing, asset sales, shares listings, M&A, earnings inflection, spin-offs, and other “value-enhancing transactions.”
Special situations bets look to pay off
For example, Azul emerged from bankruptcy and posted record earnings results. It’s expected to list shares in Q2. Gertzulin also mentioned X-Energy, a small modular nuclear reactor and supplier of specialized nuclear fuel that’s backed by Amazon. The company completed its initial public offering early in Q2 and traded at 115% above DG’s Series D purchase price from late 2025 as of the time of his letter.
After Q1 ended, DG’s long-term investments in Magnera (NYSE: MAGN), Mercury General and Talen Energy appreciated following robust Q1 results and positive guidance.
Gertzulin noted that the Iran war has created widespread disruptions in the energy sector, triggering higher prices at the pump. He also said that the situation has created opportunities in which understandable short-term concerns about prices disrupted the market.
Beneficiaries of the Iran conflict
However, in spite of the war-related volatility, Gertzulin said most companies remain strong, and he eventually expects some solution to the upheavals in the commodities markets. He looks for “some combination of a negotiated agreement between the U.S. and Iran, building of new infrastructure such as alternative pipelines, and energy supply from new geographies” which he expects to allow business to start moving forward again.
The conflict in Iran weighed on many of DG’s holdings during Q1, although others benefited. Data center power demand continues to soar, boosting the already robust fundamentals for Riot Platforms, Talen and X-Energy.
Gertzulin said their holdings in
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