May 21, 2020

Restructuring --> Direct Lending / Private Credit

First time poster--haven't been able to find substantial information on this subject so I figured I'd start a new thread. I'm wondering if anyone could provide some insight on the pivot from restructuring/distressed (IB) to the private credit/direct lending space.

Restructuring exit opps typically get mentioned in the SS/Distressed Credit context, but do analysts/associates get looks from private credit/DL shops as well? Although restructuring work is more transaction-based than typical LevFin deals, the overlap is noticeable, especially when engaged on a refinancing/recapitalization, DIP marketing, etc. Depending on the situation, RX bankers can spend substantial time reviewing indentures/credit agreements, modeling debt repayment scenarios, analyzing leverage/capacity, which I feel like would transfer well to the private credit world.

Also, is it correct to have a more bullish leaning view on the role of DL/private credit providers in the current regulatory environment going forward? Interested to hear some thoughts from people in the industry (outlook, day-to-day, lifestyle/pay) especially in the current credit cycle. Thanks.

 
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I'll bite, in the space myself. We have had several people join our private credit shop that invests cross-capital structure from RX backgrounds as the skillset is largely transferable especially if the private credit shop does hairier deals.

Day to day work revolves around reading CIM's, writing investment memo's, creating diligence lists and conducting calls with PE firms / banks, issuing term sheets / IOI/s, reading through credit docs for deals that are closing, LBO modeling, meetings with management teams sprinkled in here and there, etc. You get the jist,

You are starting to see a lot of private credit firms raise opportunistic / special sits funds which imo you would be a good fit for.

Comp is a little lower than PE, but not substantial. Ranges from ($175k-$250k) at first year associate level depending on the size of the shop and where it is located. Ares, GSO, Owl Rock, HPS, Bain Capital Credit, etc are going to be near the top of the range while your more MM players such as THL Credit, Varagon, Maranon Capital, Crescent Capital, Comvest Credit, etc.) will be slightly lower.

Granted mobility at smaller shops is much better than the larger shops and you'd be able to make it to a senior-level position faster and potentially easier. Likewise, the smaller shops generally have better hours

 

I came from 2.5 years at HL RX IB and agree with this post. I would argue that you are well positioned for any role in credit investing. As long as you are familiar with credit docs and you think how a credit investor thinks (capital preservation, downside risk, etc), no reason a credit shop wouldn't give you an interview. Now just don't be fuckin' weird like credit folks tend to be. Also, it's OK to be pessimistic on the edge of you your investment theses: that's the credit investor in all of us.

Life is more than dollars
 

Really? I've had my fair share of calls with personnel from sponsors that come across as not only weird, but also out-of-touch and arrogant.

 

How likely do you think it is to go from a smaller credit shop to a larger one in NY like Bain? Does a private credit analyst/associate have a better shot than someone straight out of IB?

 

I would say so, as long as you are doing real diligence and forming views, getting familiar with market credit terms and where the market is moving- no reason they wouldn't give you a shot. The strong LevFin shops are actually a great training ground because they familiarize you with the process and they perform a lot of the same diligence. However at the end of the day, levfin folks are only focused on selling the credit and racking fees, so I would argue their diligence and portrayal of a credit has a sponsor rose tint to the view. Just thinking how you can differentiate yourself

Life is more than dollars
 

Private credit is fairly transaction based as well. Believe it or not, a bunch of those "special situations funds" you see restructuring guys going into are actually private credit funds.

It actually wouldn't surprise me if there were more restructuring guys in private credit than secondary distressed. In my experience, the amount of seats open for the latter is far less than the former at any given point in time.

 

Distressed bros have been laying in waiting for the next downturn for 10 years now. I would be very weary of joining a rigid distressed strategy - only the shitty companies are going to go bust, just look at the principal loss rates from '07-10

Life is more than dollars
 

TBH, the top guys in private credit only care about scale... More AUM, more credits= more mgmt fees. Unless you get a huge carry allocation, the overall comp dwarfs a strong PE fund. However, MF PE are just asset gatherers too..

Look at Owl Rock, Golub, Brightwood, Adams Street, HPS... Returns are very OK if you take leverage out. However the AB's, Owl Rocks etc of the world using 2-3x leverage on senior credits... One of these highly backlevered funds WILL go bust, just a matter of when. But the top lenders (BX, Ares, Bain, etc.) are only doing strong credit and will be very fine even in a 07-08 scenario.

Life is more than dollars
 

Can you expand on the second part of your post? Interested and trying to better understand it

 

I’m in the lev fin space and have a bunch of direct lending / private credit published docs from law firms / primers - if you want I can send. interestingly I get a lot of ppl asking for this who are currently in various roles. even big 4 transaction advisory ppl asking me. happy to help. but in terms of direct insight - the guy above is your guy

 

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