Best Path to Credit Funds with Deep DD & Subordinated Debt Exposure?

To position yourself for credit funds with a focus on deep due diligence and subordinated debt exposure, here’s what you need to know based on the most helpful WSO content:

1. Types of Funds:

• Funds that conduct deeper due diligence and invest further down the capital structure (subordinated debt, mezzanine, or even equity exposure) are often referred to as mezzanine funds, distressed debt funds, or special situations funds. These funds typically take on more risk and require a more thorough understanding of the businesses they invest in.
• Well-known names in this space include:
  • Oaktree Capital Group
  • Apollo Global Management
  • Bain Capital Credit
  • HPS Investment Partners
  • Davidson Kempner
  • Anchorage Capital Group
  • Canyon Partners
  • King Street Capital
• These funds are known for their focus on subordinated debt and often have a more hands-on approach to due diligence.

2. Restructuring vs. Other Paths:

• Restructuring (RX) is indeed a strong path into these funds because of the overlap in skillsets—understanding distressed situations, capital structures, and creditor rights. However, it’s not the only path.
• Alternative paths include:
  • Leveraged Finance (Lev Fin): This group provides exposure to credit structuring and capital markets, which can be valuable for transitioning into private credit funds.
  • Coverage Groups: While not as direct as RX or Lev Fin, certain industry coverage groups (e.g., industrials, healthcare) can still provide relevant experience, especially if you work on deals involving complex capital structures or distressed companies.
  • Direct Lending or Private Credit Analyst Roles: If you can secure a role at a private credit fund post-BB, even if it’s not in RX, you can build the necessary skills and transition internally or laterally to a fund with a deeper focus on subordinated debt.

3. Best Team for Exit into These Funds (or RX Lateral):

• If you’re staying at a BB, Leveraged Finance (Lev Fin) is likely your best bet. It provides a strong foundation in credit analysis, structuring, and understanding the debt markets, which are critical for private credit roles.
• If your goal is to lateral into RX first, Lev Fin or industry coverage groups with exposure to distressed or complex deals would be the most logical stepping stones. RX teams value candidates with a solid understanding of capital structures and transaction experience.
• Key considerations:
  • If you’re in a coverage group, try to work on deals involving distressed companies, recapitalizations, or leveraged buyouts.
  • Networking is crucial. As highlighted in WSO threads, relationships play a significant role in landing roles in RX or private credit.

Additional Tips:

• Networking: Building relationships with professionals in RX and private credit is essential. Attend industry events, leverage LinkedIn, and connect with alumni in these fields.
• Skill Development: Focus on developing a strong understanding of financial modeling, credit analysis, and capital structures. These skills are highly transferable and valued in private credit.
• Internships: If possible, consider internships at private credit funds or RX boutiques to gain direct exposure to the space.

By targeting Lev Fin or a relevant coverage group at your BB, and strategically networking, you can position yourself for a lateral move into RX or directly into a private credit fund with a focus on subordinated debt and deep due diligence.

Sources: Undergraduate Opportunities - Credit Funds, https://www.wallstreetoasis.com/forum/investment-banking/how-to-prepare-for-restructuring-technical-questions?customgpt=1, Golub Capital type direct lending fund, https://www.wallstreetoasis.com/forum/private-equity/qa-non-target-top-bucket-ssg-private-creditdirect-lending?customgpt=1, Distressed publicly traded credit - case study help needed!