Really interesting part of the market that seems to have grown and gained traction over the past few years, but there is very little info about the strategy on the internet about firms that do higher risk direct lending (pre and post bankruptcy. I have also heard this being called ‘private distressed debt’. Would love to get what some people’s thoughts are on the state of this market, what is the growth potential like, any big risks or changes to that coming in the next few years?
Would also be great to get a view on some of the players that compete here. I know HPS and Silverpoint do this, but some of the smaller, more specialized shops like Monarch, Blue Torch, Redwood, Silver Rock would be great to get a read on given the lack of info that is out there.
The "hairy" direct lending or private distressed debt market has indeed gained traction, particularly as banks have pulled back from riskier lending activities. This space typically involves higher-risk lending strategies, including pre- and post-bankruptcy financing, often targeting companies in distress or undergoing restructuring. Here's a breakdown based on the most helpful WSO content:
Market Overview & Growth Potential:
Key Players:
Outlook:
The market for private distressed debt and high-risk direct lending is poised for growth, especially as structural inefficiencies persist. However, the increasing competition and potential economic headwinds could pose challenges. Firms that can navigate these complexities and maintain a disciplined approach to valuation and risk management are likely to thrive.
For further insights, exploring threads on distressed debt investing and direct lending transitions on WSO could provide additional perspectives.
Sources: https://www.wallstreetoasis.com/forum/private-equity/qa-non-target-top-bucket-ssg-private-creditdirect-lending?customgpt=1, Direct Lending --> Distressed/Special Situations Investing, Distressed Debt Investing Is really lucrative, Restructuring --> Direct Lending / Private Credit, Distressed Investing: This Time It's Different
del
But in a world where DL is increasingly more commoditized and heading towards the BSL market, are the SS / distressed credit providers able to command a pretty attractive premium to other private credit options and in turn able to offer an even more compelling product to LPs? Hear you on operational rigor
I work at one of the "hairy" firms OP mentioned and it truly is getting challenging. While you have 100-150 bps of additional yield (margin + OID) for a hairy high LTV deal, you benefit from a lot of structure and can get to the table quicker. My firm has a robust RX platform so it works well for us in the event things tank. I think firms that do hairy deals but do not have a RX platform would run into issues over time. Other firms keep granting amendments every quarter and hope for the best. There's still a lot of these DL deals out there, but its getting just as competitive as you have a lot of lenders now with underdeployed opportunistic credit buckets.
Appreciate the response. Do you think there is real growth potential for these shops that purely finance tougher credits that cant get done by the DL shops due to secular headwinds/poor financials (ie life's too short)? As it relates to the firms I mentioned in the post above, do you mind sharing your take on how strong an investment team / RX platform that they have? Tough to get a sense of their reputation without being in the space day to day. Thanks!
The challenge is getting good risk-adjusted returns for these types of deals. For example, a year and a half ago, you could complete a DL SS deal at S+800+ (maybe throw in a min MOIC, tight doc, tight covie etc) - today, that same transaction will probably clear at S+650 with a weak doc. There are a lot of situations where we were told someone was 50-75 bps tighter than us with a wider debt quantum + weaker structure and we move on cuz life is too short. My views below are based on my observation of the mkt (keeping it vague cuz one I work for one of them)
HPS - I would avoid it for now given the recent M&A. They pretty much botched the TCP M&A and I am not sure if they would focus on SS DL going fwd. While they are offering $675mm of retention bonuses that vests in [3-5 years] I am sure a lot of folks will end up leaving given potential culture clashes
Silver Point - very solid platform that does SS DL. They have a very strong RX team and have a track record of taking over businesses via debt. Raised $8.5bn recently for their DL strategy, I believe.
Monarch - very solid platform that does SS DL, but unsure if they have a strong RX practice. I havent seen them in high-profile RX situations.
Blue Torch - we call them the lenders of last resort, rip your face off type of lender. They have a guy or two in restructuring.
I know Redwood and Silver Rock, but can't comment much cuz I dont overlap with them - it seems like they are probably more distressed public investors versus true hair DL investors. Others on the list include Brigade, King Street, GTCR (they are starting one with an ex SPC person), and Elliot (hired a Cap Solutions guy but heard they are investing out of the main fund versus fundraising dedicated DL capital).
Also typing from my phone so I'm sure the above is riddled with grammatical errors.
are you at an institutional AM or independent? What kind of exit opps do you have at this juncture given your lack of PE relationships (I'm assuming)?
A few other firms to be aware of that will play in hairier secured stuff:
- TCW
- Oaktree (both PC and opportunities)
- Cerberus direct lending
- Macquarie
- Centerbridge
- Angelo Gordon
- Sixth Street
Long tail of people willing to do hybrid / junior capital as well. Tend to view this as a hard way to make money, due diligence is harder for very limited additional spread, in addition to check-sizes being a bit smaller given companies tend to be smaller.
Cerberus doesn’t do much if any if this. Mostly regular sponsor finance
I've seen them in some pretty hairy deals by industry / business that firms like a Blue Owl wouldn't touch. To be fair this may be some legacy deals from when Kevin Genda (Blue Torch founder) led the business but they are publicly in certain businesses like Airtron, Dex Imaging, and Whole Earth done this year which aren't down the fairway sponsor finance type deals and a bit more "storied".
For what it’s worth, Cerberus has gotten involved in at least some hairy deals
Is it a case of harder to make money now but, when a cycle comes, these guys will be well positioned?
Structuring is critical. Lower LTV / detachment point on the senior cash paying debt, blend return upward with a piece of structured equity between the senior debt and common equity, and throw in an equity kicker on the backend is a vanilla way to do it. Can get more creative depending on the situation and borrower’s / sponsor’s level of desperation e.g., FO/LO, PIK features, participation in the common, and so forth
Documentation is huge point of differentiation between different segments of the market (LMM vs MM vs UMM). In the LMM, there is less competition from capital providers in general, but especially when some no name sponsor gets his hands on a decent business but runs it into the ground. You get what you want in terms 3-4 covenants, put rights, etc. You don’t loan to own bc at the end of the day your investors want income from coupons but you underwrite to a case where you do become the equity and have a playbook for that.
UMM is harder I think. More sophisticated sponsors, tougher lender competition and violence, scarcity of opps, larger liquidity or capital needs
Oak tree and appaloosa, Elliot
College freshman just read Caesar's Palace lol
Blue Torch
FS Investments Tac opps/opportunistic credit (ex-GS SSG guys)
MGG Investment Group
Colbeck
UBS O'Connor
Fortress
TCW still has a team
etc.
Does anyone have any insights for MGG investment group and/or types of deals they work on?
Bump
Um… congrats on working there I guess?
Any thoughts on potential exits from the space? Could you pivot to a true large distressed debt hedge fund after a couple years there?
Yes that's one of the main places they recruit
Any tentative list top of mind for the best performing or top-regarded SS/distressed hf’s? I’m aware there are some lists on wso but detail is limited.. thank you
Do SVP play here? Saw they hired a guy from Beach Point to run the strategy and curious to hear how it differs from their opportunistic / distressed teams.
Yes they do. Called structured capital.
Bumping - anyone else have some insights on this?
What are typical hours for these roles?
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