Q&A: VP in LO Public Credit

Sure thing. Assuming you mean our private side which I don't really cover. I'm not sure on number of deals but they probably average $100-200m per check, have the potential to go a little larger and eat a whole deal but they generally play slightly larger deals where they hold 30-50% of a tranche.

Comp obviously varies by shop. For me at a very large manager, it was $250k as a first year up to roughly $390k in my final associate year. Probably the best comp/hours balance I'll ever have since that was a junior analyst role (i.e., I wasn't responsible for making credit calls myself but was supporting a senior analyst in doing so), so I worked extremely low stress 50ish hour weeks and really could've fulfilled my responsibilities in 20-30 most weeks but seniors trusted me to do some of their job (with supervision) so I worked more. At VP level I'm a senior analyst / sector lead so more fun but also more stress. Comp depends on fund size again but I'd say anywhere in the $400-600k range is probably market. Also depends a bit on strategy...my old shop was very large so at the high end of that range / maybe a bit above but it was pure play HY so no carry, etc.

Big traditional AMs: Blackrock, T Rowe, Capital Group, Lord Abbett

Alternative AMs: Oaktree, Ares, PIMCO, Apollo, Blackstone

Smaller independent credit-focused AMs: Beach Point, Octagon, Golub (there are a ton of good ones in this tier so I'm sure others will have names too)

Hedge funds (distressed guys will play in performing credit a lot depending on distressed market, some have dedicated performing teams): Anchorage, Sculptor, King St

As I mentioned above, comp varies a lot with AUM. Performing credit generally just charges a management fee in the range of 50 bps so pretty easy to back into how much is available for comp, but some general ranges...

Associate - $225-400k

VP - $400-600k

MD - $600k-1.5m

PM - $800k-5m+

At most firms I've seen, VP/SVP/MD are all really the same job, just different levels of seniority, so it just kind of scales up subject to your performance and firm AUM. I know somebody will ask this but no, there's no set timeline for promotion, at least at my firm. Generally speaking if you came on as a VP as I did, it's probably 8-12 years before you start getting looks for PM. I'm in my mid/late 20s, will probably be in consideration for PM sometime around 35-37. But PM seats are obviously hard to come by so it may take longer.

Definitely opens the door. Probably right there with RX as the most common background I see. I know LevFin groups kind of vary across the street in terms of how "capital markets"-y they are but depending on your experience it may even be an easier transition. In addition to learning my industries, I had essentially no working knowledge of how the market actually works in terms of technical dynamics, etc.

Coverage groups can get you into public credit as well, but as with any job, you need to be able to explain why you want that seat which is a little harder for analysts that worked on other kinds of deals. Industrials analyst that worked on multiple HY deals? Easy enough to explain. TMT analyst focused on IPOs? Interviewers will understandably be skeptical that you're actually interested in public credit. There's also definitely some selection bias buried in that observation, in that TMT analysts are going to be more interested in VC and other stuff, but I think the point stands.

I usually get into the office 8-8:30. My morning is spent dealing with stuff, new deals, morning earnings or overnight news, that type of thing. Afternoons are generally when I work on longer term or less urgent stuff like generating new ideas for our various strategies, reading research on my sectors, or speaking with connections on the sell side. Depending on how much of that stuff I have to do, I'm usually done somewhere between 5-7 with a usual non-earnings week probably being 5:30-6.

CFA is definitely not necessary. I think it's probably a value add but not enough to make it worth the time suck. Some firms will make you get either a CFA or MBA to make senior analyst. Mine doesn't. I don't have one and don't really plan on getting one unless somebody tells me I have to.

No problem. RX and LevFin are both super common. You'll also see industry coverage bankers and some sell side HY analysts transition to the buyside. To be clear I'm talking about HY "desk analyst" type seats, not traders or salespeople, at least for credit analyst roles. Other backgrounds definitely happen but as far as I can tell it's super ad hoc and hard to draw more general conclusions about those.

The two main differences are process and liquidity. In terms of process, a bank will syndicate public credit to a broad array of buyers whereas in private, they'll negotiate directly with the company or sponsor and you'll only have one or a few buyers in each deal. On the public side, the time from announcement to closing can be anything from a few hours for a HY drive-by issuance to maybe 2 weeks for a not well know loan issuer. In private markets, they do way more PE style diligence so it takes longer. And private negotiates price, whereas in public it's more like the bank saying "this is gonna be 7% area, take it or leave it." And then in terms of liquidity, I know what I can buy or sell any security for at all times on the public side since these things trade. Maybe for some super small distressed tranche there's a 3-5 point bid/ask but overall it's relatively liquid. In private, they generally don't trade barring some distress or a fund issue or something like that; you have to be prepared to hold the deal all the way to maturity. And if they do trade, it'll be subject to the same diligence and negotiation process as with the initial underwriting.

I know this is contradictory to what I mentioned above, but honestly a CFA or MBA might be your best bet. I don't think I've seen anybody make the equity -> credit transition directly. The only other thing I can think of is to try to get coverage of an industry that has a lot of HY issuers. If you know the industry you can learn the bond math. I would think it'd be easier for IG but I'm not as familiar with people's backgrounds there.

I think pretty well insulated from automation. The calculation of credit metrics can be done by a computer but I think it'll be a while before computers become competent judges of relative value and "known unknown" risk. Automation (as with algo trading) will happen in more liquid markets first, so HY credit definitely won't be the first domino to fall. Also, a broader comment which applies to equity as well, I think firms are really underestimating the importance of grooming juniors for eventual senior seats w/r/t AI. Yeah, a computer can calculate leverage and build you a three statement model, but you still need a senior to process that output and develop a view along with more intangible stuff that computers have a hard time analyzing. But if you completely automate the junior end, eventually your seniors will retire and then what're you gonna do, promote the computer?

Didn't mention it above but I've seen corp banking backgrounds here. Not the most common, but it certainly happens. I would think the main hurdle is going to be a case study just given longer timeframes for corp banking. Case studies in HY are generally 3ish hour format like a PE case study but instead of focusing on paper LBO returns, you're looking at credit metrics to answer the question of whether you like this bond. Other than that, it's just networking. I would imagine you have some connections among the levered loan investing community but a lot of shops do both so you can probably find one that works for you.

As for distressed, that's a skill that takes time and even coming from an RX background, it's one I'm still learning as an investor. The process of having a bond go from par to 60 is very different than RX banking where you get involved when the bond has already traded off. If you're really worried about it, a lot of shops have some sort of distressed/workout specialist, usually a senior person with a distressed background who will advise and oversee those processes; you could look for a firm that has that if you'd like a little handholding on your first live reps. But lots of firms hire people with no distressed background so I wouldn't worry about it too much. Eventually you will have an investment go south, we all do, and after a few of those you'll have spent more time than you care to thinking about the distressed process.

See above re: corp banking (I think I was typing when you posted, not your fault). For distressed specifically I think it's a rarer move than performing. You really need an understanding of the restructuring process. Opportunistic can mean a lot of things...for us I'd call it "stressed but ultimately performing." If you're looking for something like that, buying stuff well below par with an eye to par-like recovery without a restructuring, corp banking probably works. If more true distressed, you probably need some more direct experience.

Absolutely. A lot of the analysis is essentially the same, just modeled more granularly on the private side. You'll have to get used to the timeframe; learning how to develop a view on a credit in a few hours definitely takes practice. But otherwise, I don't really see any obstacles. It's definitely more common to see people go private -> public than public -> private. For what it's worth, I generally agree with your comment on relationships vs. acumen but I'd note that relationships are still important on the public side. If you can get access to bankers and management in pre-marketing / "early look" stage of a deal, or if you're consistent and thoughtful with your reverse interest, that can really help performance in the long run.

Why would you want to do this? All the momentum is on the private credit side in terms of asset flows. The fees are materially higher, like probably 3-5x when factoring in performance. Comp is higher. Hours are more consistent. Additionally its a more transferable skillset. Seems like if you're in private credit your goal should moving up...not moving to the public side. 

Counter point: As with any public role, you’re exposed to the irrationality of the market and have no say on terms, rarely have a seat at the table

Uncommon but not unheard of. I'm oversimplifying here but it seems to me that you can be a decent IG manager by getting macro / duration calls right. That's not true in the HY. Everything in the HY universe is "junk" for a reason, to varying degrees. Obviously macro still matters but micro is what really drives performance. I'll phrase it this way. C0A1 (AAA index) spread is 49 vs. 150 for C0A4 (BBB). In high yield, H0A1 (BB) is 265 vs. 923 for H0A3 (CCC). So picking winners and losers can be a lot more important to long term performance relative to macro calls (obviously not implying that it's unimportant in IG, but you can really screw yourself catching falling knives here, which doesn't happen as much in IG). If you can demonstrate your ability to do that, via case study or however else, you should have a shot.

This is not a good example, don't follow my lead. But to be honest, I basically got my Thanksgiving blown up in banking ~2 weeks before on cycle kicked off (this was 2017 when on cycle was in December) so I had WLB top of mind when recruiting. That's how I got into public.

As for why I've stayed, I had great seniors at my first buyside shop who really taught me a lot and encouraged me to become better. I owe those people a lot. That said, I've grown to actually love it. Public gets a lot of crap for being more shallow than private. That's certainly true in a "how much info is going into my model" sense, but in public we have to contend with market forces which has been another learning experience for me and has kept me interested. There have been times where I was right on fundamentals but wrong on market sentiment/psychology, so I was wrong. It's something I continue to learn every day.

And let's be honest, the WLB is maybe unmatched. I work 50 hour weeks. I can get work fulfillment, work out 5x a week, go on dates, see my family and friends. It's hard to check all of those boxes in this industry. Am I making absolute top dollar? No. If I benchmark against my MF PE friends, I'm probably $500k+ behind those guys in career comp 6 years into my career. But I'm ok making that trade-off. Some introspection is necessary on that call; to each their own.

Yep, it's very research based. I'm assuming by "limited chat with the team" you mean external...I talk to my traders and PMs every day, bouncing ideas and whatnot. In terms of external communication, it depends. If you're big in a name (or if you're just a big fund), you can sometimes drive deals via indicating reverse interest and talking to management teams and bankers. It really depends. I know some guys who are perpetually muted on every call because they just want to understand and come up with their own ideas, I know others who are very proactive in terms of getting their thoughts in front of counterparties. Depends on your style.

As for satisfaction, I guess I don't really understand the question. I don't really get satisfaction from process. It can be interesting, sure, but it's not what drives me. Fundamentally, you're playing different iterations of the same game. In private it's "be right x 10" and in public, it's "don't be wrong x 50." That's an oversimplification because there are degrees of "right." I can be right by going market weight on a name that does fine, or I can be really right by going overweight a name that outperforms. I'm very competitive (was an athlete in college) and I'd almost argue that public it's more satisfying because every day I get real-time feedback on just how right I am. Personally, I'd rather have the opportunity to adjust my positioning frequently and stay right every day rather than invest in a deal and find out 5 years later whether I was right. I'll give you an example, being vague for anonymity. One of my sectors performed very well across the board over the past year and we were overweight. Q2 earnings were good again but Q3 outlooks were somewhat weak, but the market mostly didn't react. So I'm now underweight that sector. If that plays out, I'll probably leg back into an overweight 6-12 months from now. So I have 3 opportunities to be right over ~24 months (plus credit picking at each of those points). Long-term, that's just much more interesting to me.

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Thank you for doing this! Have you ever seen someone make the jump from HY/distressed credit to equity l/s?

There are ex-anchorage / silverpoint people littered over the street at equity L/S funds so its definitely doable. 

Yeah, agree with the above re: Anchorage and Silverpoint, among others. Definitely more common from the distressed side as opposed to HY. It's just fundamentally a different type of investing, right? Forget about asset class and fundamental analysis for a second. In HY, I'm benchmarking against an index and I own a bunch of names that I view as approximately "fair value." I don't have a strong view that those credits will improve or drive meaningful outperformance, I basically just own them so I don't get burned if that sector rips or if I'm wrong on one of my high conviction names. Diversification, essentially. In both distressed and L/S equity, you may technically benchmark against an index but you're much more concentrated and your portfolio is basically only your best ideas. So you have to translate both analysis and mindset, which is much easier coming from distressed.

Sure. Coming from RX and a non-balance-sheet bank I didn't really do any underwriting in banking so I guess I can just go over my current process. If it's a drive-by I'll just identify key points, discuss with my PMs, sometimes do a quick model...the turnaround from deal announcement to closing is like 5 hours and timeliness can impact allocation so I'd rather be fast and directionally correct than precise. I can always backfill the real diligence in a few days; new issue bonds rarely trade off more than a quarter point so doing it tomorrow is essentially the same as doing it today.

If I have a few days, I'll listen to the deal launch call and determine whether I think this is reasonable for us. If not, I'll send my PMs an email detailing why not...maybe it's a bad business, not the right time in the cycle, overlevered, whatever. If it's realistic, I'll start on a model. These are not the most complex models in the world, I'll usually model each segment with a few simple drivers for both revenue and cost. As I'm reading filings and working on the model, I'll naturally run into questions. Often times 1-2 days after the initial call bankers will reach out to set up 1x1 or small group meetings with management, so I'll keep a list of those questions and address them in that meeting. Before the meeting, I'll keep my PMs abreast and tell them how I'm thinking about this so they can start thinking about how whether it makes sense for various accounts (sometimes it works for CLOs but not loan SMAs, whatever the case may be). Once I've spoken with management and sharpened the pencil on my model, I'll send a full investment memo, usually ~5 pages with a situation overview, model outputs, credit strengths and risks, and some comps or relative value analysis. After they've read it, we usually have one more call where they can ask any last minute questions or get my thoughts on position sizing before pulling the trigger. For our opportunities strategy, these are usually secondary ideas so other than price movements, there's no real deadline and I can spend more time, which results in more detailed models and lengthier memos. That also applies to private primary names.

After the deal is in the portfolio, the main tasks are keeping abreast of earnings and news. That will drive relative value decisions but there's obviously no real schedule to those. Most shops, including ours, have some sort of industry/sector review process where analysts will sit down with PMs on a regular basis to talk about performance, positioning, etc. which can drive some work as well.

Yeah it can be super frustrating, I hear you. Going through something similar right now where the fundamentals keep deteriorating but the bonds are tightening and tightening. Sometimes you can't fight Mr. Market...

I'd generally agree with your observations on name count. I'm in the 40-50 range right now, which is a bit higher than average because I started buying into some new CCC or B names over the summer. In my associate gig I was doing ~60 but the senior guys were at 30-40 and I was shielded from some of the higher-level thought that goes into building a portfolio so 60 was reasonable. It kind of depends on industry, too. Take gaming for example. You certainly have to know which names play in which markets and some of the other differentiators, but it's all the same business model, so the difference between covering 5 gaming names and 20 is not huge, other than updating more models. But for an industry like fins, it's the opposite because it's really 10-15 different business models that you have to learn. So I guess what I'm saying is that the average name count you cited is probably about right but even within a fund you can see some variation just due to coverage.

I mean, yeah, pretty much. It is relatively simplistic, at least in terms of the level of analysis going into an individual buy/sell decision, as compared to the private side. I once had a discussion with a PE friend when we were both covering the same industry and we talked about how he can build a 10k line revenue model, I can slap a growth rate on mine, and we'll probably come out at about the same answer. Being that close to the numbers and having worked on portco synergy achievement and the like, he would be infinitely more prepared than me to start a business in that industry, but that's not a goal of mine so I don't really care.

As for "being more stimulating / closer to investing," I think that's actually two separate questions. Level of stimulation is very individual; I mentioned before that I just have 0 interest in the more mundane and process-oriented work that comes with the private side, so for me the mark to market and understanding of public market dynamics plenty stimulating. I don't feel the need to iterate a receivables aging analysis or negotiate the minutiae of an Adjusted EBITDA definition. For the record, I can do and have done both, but I left banking for a reason.

"Closer to investing" is also individual in that everyone has their own perception of investing, but it's also not. Fundamentally, I view investing as the search for adequate risk-adjusted returns. Using an ad absurdum example, GME YOLO calls / wallstreetbets does not qualify as investing to me because there's no concept of risk there, just vibes. You in PE and I in public credit are both addressing risk, just in different ways. You're addressing it via deal-level financial engineering and analysis, I'm addressing it by a combination of credit selection, diversification, and portfolio construction. I would argue that neither is better, it's just the tools available in our respective markets. You can't possibly construct a properly diversified PE portfolio with, what, 15-20 names in a fund? So you make each deal the best it can be. I (for the most part) can't change the specifics of a public credit deal, so I choose multiple to construct a well-positioned portfolio. I don't think that means either isn't investing. Also, going back to the stimulation thing above, I'm perfectly satisfied, so if somebody thinks what I'm doing isn't investing, that's fine by me.

No worries, I'll share some thoughts and if it's not what you're looking for I'm happy to follow up.

Technical skillset wise, you'll be fine. You probably don't need to learn anything new, though brushing up on how to do a 3 hour format case study is always a good idea. The skills you'll need to learn to succeed on the job are going to be very intangible...rapid decision making on subjective qualities, maintaining or reevaluating conviction when demonstrably wrong, and learning how to hedge (conceptually, not like a rate swap or something) when comparing yourself to an index.

As far as the actual transition process goes, like I said, case study will be important. I mentioned this above but you'll also need to convince interviewers that you want to be there. Coming from PE that probably won't be super easy but I'm sure you'll be able to come up with something. I'd have 2-3 long pitches ready to go. It'll depend on the fund but these don't need to be superhero ideas, just something where you like the business model and relative value will be fine. Keep in mind that credit investors are inherently skeptical / downside-minded so pitching a B2 with good trends and asset coverage is probably better than a Caa2 where you might make 15% but you also might get impaired in a restructuring.

I don't know much about structured so going to stick to the liquid side of things. For learning the ropes and primers, most of them are book length so might be too much too late but A Pragmatist's Guide to Leveraged Finance is very good and pretty easily digestible.

When you're pitching, you usually want to give a 2-3 minute opening statement. Stay brief, if you talk at length at the beginning then 2 things happen...1) people get bored of listening to you drone on and 2) the follow-up questions they ask will be more detailed and you'll have a higher chance of getting them wrong. The key questions you want to address in your opening statement are:

Is it a good business? How do they make money? Is that repeatable? Do they have a competitive advantage? Is it cyclical? That type of thing.

What does the financial profile look like? Do they have high margins and low capex like a tech company, or is it a lower FCF business? How much debt can they reasonably support? How does that compare to current leverage?

What type of return do you anticipate and what is the catalyst for that? Maybe you think the company is mis-rated and the relative value looks attractive. Maybe it's a cyclical business and you think they're due for a couple good quarters. Maybe it has a high coupon and you like the current yield. In a stressed/distressed scenario, maybe you see weak docs and an opportunity for some type of creative transaction.

After that, I'd just let them ask question and direct the conversation. Any credit PM will certainly ask you about downside protection / how this goes wrong, so you'll need to think through a couple risks and how you think each of those impacts the investment. I'd also be prepared to speak to valuation...some managers place more emphasis on this more than others but it really depends.

Long only