Diligence in Distressed Debt
How much diligence do distressed debt hedge funds do when looking at an investment? Are they really going deep on business / credit fundamentals and getting fully rounded out view on the industry and competitive landscape as well as doing heavy valuation work? Also would be great to get a sense for how much of it is business diligence / legal and process work.
Any firms that stand out particularly for how how deep they’ll go to come to a conclusion?
Would also be great to see how this differs on the opportunistic/ private distressed side.
Distressed debt hedge funds often engage in a multi-dimensional diligence process, but the depth and focus can vary significantly depending on the fund's strategy and the specific opportunity. Here's a breakdown based on the most helpful WSO content:
1. Business and Credit Fundamentals
2. Valuation Work
3. Legal and Process Work
4. Opportunistic/Private Distressed Side
5. Firms Known for Deep Diligence
Key Differences Between Public and Private Distressed
In summary, distressed debt hedge funds can go very deep on diligence, but the extent depends on the fund's strategy, resources, and the specific opportunity. The private side generally allows for more granular diligence, while the public side requires creativity in piecing together available information.
Sources: Distressed Debt Hedge Fund out of College - Prep Advice, Credit Hedge Fund opportunities, Credit - Pod Shop/MM vs. Distressed/Special Sits HF, Q&A: Credit hedge fund analyst at MF, former BB trader, Distressed Debt Investing Is really lucrative
this is a dumb question.
yes, funds will have a view on industry, competitive landscape, and valuation. depends on each firms specific investment model, but most designate analyst coverage by industry. Analysts that cover an industry for a few years have an opinion on who the winners and losers are. barring fraud or catastrophe, these are relative large businesses that don't go belly up over night. Its a gradual train wreck that you can tell is heading to BK a few quarters, sometimes a year+, out.
If you're flipping 1L, 2L and bonds based on market mispricings or a catalyst, diligence is a little lighter given trading orientation & liquidity, as compared to investing in debt with the expectation that its eventually equitized, and will essentially make you an operator of an asset. So like PE. In such cases, yes, you should expect to get very in the weeds on business diligence. No company undergoing BK is perfect, but ideally you avoid those with obsolete business models and in secularly declining industry.
Any large fund will have dedicated in-house legal & RX personnel for process & legal diligence.
I meant from a relative perspective. What you just said about diligence can be applied to a CLO shop which does comparatively low diligence versus private equity or even private credit as as an example.
Point of question was to ask people whether the diligence is very very robust. Have heard several stories of many distressed firms public and private doing some work but nothing spectacular or out of the ordinary.
It would be great to hear what industry professionals that have worked in some other spots have to say about it.
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