Distressed PE vs Distressed HF?

What exactly differentiates a PE firm specializing in distressed debt from a distressed debt HF?

Does the private equity firm intend to take control of them company, while the HF would just go along for the ride?

I have been reading http://www.distressed-debt-investing.com/ pretty regularly, but not much mention is made of distressed/HY PE firms. What are some examples?

 

I'm curious as well...don't distressed debt HFs do loan-to-own as well (e.g. silver point)?

My guess (VERY speculative): distressed PE buys private debt, distressed HFs buy public debt. is that true in anyway?

 
Best Response

Regular (Buyout) PE: Sponsor buys company using debt. Company pays down debt, improves operations, is sold at a higher multiple than it was purchased at. Example: Bain/TPG/GSCP buys out Burger King, IPOs it in 2006.

Distressed PE Varies. The sponsor can a) buy the equity of a distressed company, b) buy the public debt of a distressed company and steer for reorg to gain control, c) buy assets of companies that are in bankruptcy. There are a million variations/blendings of these strategies as well.

Example of a): What BX and Icahn tried to do with Dynegy. Sometimes scenario A involves buying the equity AFTER a bankruptcy to infuse cash and pay down debt.

Examples of b): Carlyle bought Metaldyne bonds during the downturn, ended up holding the keys. Apollo et al bought the mezzanine debt of Gala Coral in the UK and seized control from various UK buyout groups.

Examples of c): KPS bought various forging assets out of bankruptcy to form HHI.
Wayzata Partners bought various forging and stamping assets out of bankruptcy to form Grede Holdings.

These transactions can happen in any part of the bankruptcy/reorg process (Before/during/after). If the sponsor buys debt before hand, will often try to get involved and negotiate their way into being the "fulcrum" security (the creditors that end up holding the controlling equity stake) whereas a HF may want equity or they may just want to get paid out at par (usually they'll make money either way).

One thing that seperates distressed PE from regular buyout PE is that distressed sponsors sometimes buy their initial stake on an unlevered basis and then do a dividend recap/backlever once the company has turned around. Usually a company in distress is in no place to be taking on debt and interest expense.

Depending on how it's executed, distressed PE can blur the lines between PE investing and hedge fund investing (like the Carlyle example.) Many distressed debt hedge funds take illiquid positions and end up holding equity, so like Smitty pointed out sometimes the only real difference ends up being whether they're gunning for control or not.

The lines blur even further because most of the big sponsors have various debt/special situations arms as well (Bain/Sankaty, KKR/KKR Mezz, BX/GSO, TPG, Apollo and Ares have credit management arms as well, places like Oaktree and Carlyle have multiple funds and flexible mandates to allow them to buy distressed securities as well as taking controlling equity stakes.)

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
 
Kenny_Powers_CFA:
dividend recap/backlever once the company has turned around.

what is back leverage? and can you give an example of how it works? heaven't heard of this term before. thanks

 
fomc:
what is back leverage? and can you give an example of how it works? heaven't heard of this term before. thanks
Back levering means that the debt is at the portfolio level rather than the asset level, if that makes sense. For example: I raise $100 and make an unlevered buyout. I now have an asset (the equity from the buyout) that I can borrow against to make another buyout. Put another way, you borrow against your equity interest in the company, rather than the assets of the company.

There are a number of reasons this isn't ideal, and I can't say it happens that often with equity sponsors-the few examples I've seen have been evergreen/family office/conglomerate sponsors who don't necessarily have the same outlook as a pure buyout sponsor.

It's more common in the mezzanine/MM debt world, because those portfolios produce steady cash flows to support the debt, and in real estate, for both cash flow reasons and the fairly reliable asset valuation.

An example of this is Garrison's CLO of its MM/distressed/mezz loans: http://www.bloomberg.com/news/2010-07-29/deutsche-bank-said-to-market-3…

Lynn Tilton, who's been in the news a lot lately, actually patented a distressed CLO structure which her firm uses to take controlling equity stakes (not really related to backlevering but interesting and relevant to the topic). http://blogs.forbes.com/investor/2011/04/06/lynn-tilton-diva-in-distres…

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
 

Compensation is generally based on multipes of base and they should guide you to a range, esp at the HF. I agree with iambateman - you have to figure out if you want P/E or trading but here are some additional thoughts:

1) There are going to be a lot of distressed ops in the next year so as long as this PE shop is a decent size and aggressive, you will close deals. You can always ask the shop how busy they are which is a pretty good indicator. Also, monitoring companies isnt that bad as you deal with management (C-level) and can learn about operating companies etc. I also dont know what you mean about "boring" industries. A lot of big PE deals over the past few years have dealt with "unsexy" industries like Auto but the deals themselves are still interesting. You should read this article: http://lbo.djnewsletters.com/exclusives.asp?s=DEALBOOK&sid=LHNQHJKKQPI

2) You will make contacts in a HF, they will just be different from those at a PE shop. You'll meet individuals at other HFs, industry analysts, etc. Also, the deals at a HF are vastly different from deals in a PE shop so i dont think the two are comparable.

In the end, just go to wherever your most comfortable. Both are good opportunities. As for your last question, its generally easier to go from PE to HF but each situation is different.

 

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