If asked this question, how would you guys answer it? Besides the fact that Distressed PE will be more flexible, looking up and down and cap structure and the story is more interesting since you are trying to figure out what went wrong with the company and trying to gain a controlling position by either buying debt or equity, what else should be mentioned?
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You can say you like to extract value and improve companies' operations.
Is that not the same with traditional PE?
i usually think of traditional PE as utilizing leverage and multiple arbitrage to drive returns
But traditional PEs do focus on the operational aspect too and how they can increase earnings which drive returns for them
Having worked in distressed (both on the public and private side) for the past few years, I can tell you what I find interesting about distressed in particular is:
1) The flexibility/opportunism of the investment -- in "vanilla" PE, you are typically making a long-only investment in the equity of a company. In distressed, there are a lot more wrinkles: What security(ies) do we want to invest in to get control? How do we get ourselves in a position to control the process? In-court or out-of-court? What does our restructuring plan look like? etc...
2) Being right where other people have gone wrong. It's a lot of fun, and a nice stroke to one's ego, to make money where a lot of other smart people went bust.
3) Problem solving -- distressed investing is about solving problems. It's a fun and creative process. Vanilla PE is, as one poster put it above, about using leverage and multiple arbitrage to boost returns.
Now, I caveat all the above by saying that I find large-cap distressed PE to be very similar to vanilla PE...you are looking at very picked-over, heavily shopped opportunities and working within a strict process defined by the company's FA. In the end, you win when you pay the highest price, not because you have the most creative solution or have identified an opportunity others have ignored/written off.
I'm in LMM Distressed PE, mostly industrial businesses with revenues under $200M and in extreme distress. I love the work. For me it's a combination of the following, much of what MRB said.
Speed and intensity. The building is on fire and value is plunging. The whole debt stack and equity are all hitting the panic button and any going concern value will need to be salvaged quickly.
Murkiness. Insolvency is murky and most commercial attorneys don't understand it. Gives you room to spread your wings.
Clarity. When the world spins faster my mind slows and I start to see options.
Playing in traffic. Distress brings all sorts of assholes looking for a fight, collection attorneys, regulators, union bosses, etc. I don't like to fight but I do enjoy the challenge.
Fortune. It's possible. Our opening balance sheets would make anyone jealous. Starting income statements, not so much.
As MRB said, Problem Solving. To mix metaphors, it's like playing chess with a really shitty hand.
Odds and Expectations. My odds are WAY better than a startup but expectations are way lower.
I love how "murkiness" and "clarity" are both on your list. Juxtaposed, even!
Interviewer: What do you like about distressed PE?
You: I crave the interplay between opposites. Ambiguity and clarity. Success and failure. LIGHT AND DARK. LOVE AND PAIN. FROM SELF-IMMOLATION I RISE FROM THE ASHES, A PHOENIX OF TRIUMPH FROM THE DEPTHS OF DESPAIR!!
Interviewer: [blinks] [gets up, goes to shredder] [inserts your resume] [goes home]
Interviewer: "Why distressed PE?" You: "Why distressed PE you ask?" You: "Because everyone can make money in the good times, when the markets up. But it's in the blood-bath times, that the good operators and turnaround investors rise to the top and begin the process of setting the bottom and redefining equilibrium in the market." Then just proceed to walk out of the interview lol jk.
With recent cuts in valuation and latest funding rounds coming up short. Corporate debt levels at record high (1.2 trillion I think according to a CNBC article).
Distressed PE will be the place to be in 3-4 years. Multiple expansion is under pressure and your normal PE firms will want to exit and return cash to investors instead of operating or owning these companies.
You can say the same thing about vanilla PE. You don't need to be a distressed investor to separate yourself in the down times by being a good operator and/or creative owner. You're right that the down times are what separate good investors from bad ones but that's true in any type of investing.
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