What do you love/hate/regret about public credit/HY/Distressed?
Contemplating a couple career shift options and wanted to gather some anecdotes specific to public credit/HY/distressed (looking mostly for public credit, but I'll loop any deep value equity / opportunistic across capital structure in the last category).
What do you love / hate about the space? Any major regrets? I understand the industry / mechanics and am currently in a tangentially related seat, but I'm looking to canvas opinions / anecdotes about the job itself.
For background I'm at a fund that invests across the cap stack both public and private (bias to private) - >$1bn AUM but $5bn. I do love the complexity and intellectually stimulating work. Everyone in every strategy says that each investment is different, which is true, but in my experience each deal has been wildly different which has lent itself to a lot of diverse learning experiences. I'm also a contrarian by nature so I chose to pursue a strategy that was aligned with my personality. I like the idea of investing down the risk spectrum but was never one to get super excited with something of equal or more risk like VC; so distress felt like the natural fit. There are a lot of smart people and funds in this space but I do think it's one corner of the investing world where you can still find attractive asymmetric opportunities given all the legal nuance, emotional reactions, etc. Before some L/S guy comes in yelling that they can find asymmetry/edge in the market too, I'm not saying it's impossible in other strategies just more prevalent for the reasons I laid out. There's also a constant state of evolution - some smart lawyers or investors are always coming up with new ways to maximize returns or screw everyone else (not mutually exclusive often times). I enjoy that there are always new stories coming out with things like uptiering, trap doors, Texas 2 step where it's keeping everyone engaged with what's going on in other deals that you may not be directly participating in. Lastly, given all the complexity you tend to get compensated well for being someone who can make an opportunity out of something where most are selling out of and you settle in a space that has a high barrier to entry regarding technical and legal skillsets. To be clear I don't subscribe to the notion that a lot of Rx/distress guys declare thinking that our strategy is somehow better, just that there is a legal learning curve you need to get over that a lot of others don't want to do - not that they can't.
Now to what I hate. When times are good you're having to dip way down the risk spectrum to true shitco's to find opportunities - also depends on your funds hurdle returns. Before cracks started to show here recently, opening up more opportunities in good companies with bad balance sheets, it felt like I was dealing with a room full of screaming kindergarteners who all snorted a mountain of Miami's finest with how some management teams and advisors acted. There are always going to be some opportunities but you need to be ok with not enjoying the same wide-spread euphoria while high schoolers are self-proclaimed millionaires from monkey jpegs. Part of being counter-cyclical. To that point, it can get very hard to raise money in the good times. A lot of funds fizzled out over the last 10 year bull market or had to downsize substantially. Most distress funds love the broad mandate but remember LPs have buckets that they like to allocate to (e.g., public equities, HY bonds, RE, DL, etc.). It gets hard to fundraise when you're marketing yourself as "we can do everything". If you don't believe me check out any of Friedman's
from Canyon Partners where he describes his fundraising process early on. Back to the personality point - you need to know yourself and how you react in stressful situations. All investing seats are stressful, now add in a bankruptcy process with 3 sets of bankers and lawyers all running around with their hair on fire trying to screw each other over assuming its a zero sum game (kind of is in a way).With the recent end of the bull market, there's been an uptick in people on this site and more broadly interested in distress. It's more topical and creeping into more conversations as distress starts to reach up out of the dark well of shitco's that I referenced earlier and to more "everyday" businesses. Not saying this is specific to the OP but I would feel irresponsible not saying this: do not try to use your career to time the cycle. If you like the strategy for the right reasons, you can have a long and successful career in distress, but there's no reason to try to jump over to distress just because Lisa A. is sounding the doom alarm every morning on Surveillance just to try to hop over to a growth fund if/when rates come down.
Last thing. No regrets. Raise rates to the moon and I'll happily run into the burning buildings and pick up the 100 dollar bills everyone left behind on their way out.
Hope this helps.
Is it common for analysts to work across public and private in this space? Do people come from public (HY/LL) into these roles or mostly sell side analysts/bankers/private guys?
From what I've seen around, most funds would be at least open to both public and private. However, every other ss/distress fund I've seen has an obvious bias. There may be a 50/50 shop out there I just haven't crossed paths with. We saw a lot of public bias funds lean more into private during the low rate environment to expand what was a pretty small pipeline of opportunities in the public markets.
Rx, M&A, HY/LL backgrounds definitely have the most precedented path but that's not to say you can't come into the space from somewhere else (e.g., law, DL with some workout experience, etc.). When you come into a strategy that tends to have a very broad mandate there are inevitably going to be areas that you haven't trafficked frequently. For example, the HY/LL person may not have a ton of take-over/control experience like an M&A or Rx candidate would - vice versa for bonds or BSL's.
Wdym by you’re a “contrarian by nature”? Why do you think that fits the distressed investor mold (so to speak)?
You're taking a different view than the market while the target is either in distress or in a complex situation that makes it hard for the market to determine value.
can you describe your investment process i.e. do you build models from scratch, general day to date and difference to vanilla direct lending?
Investment process and day-to-day are going to be vary difficult for me to answer. The reason why is our mandate is extremely broad – I've worked on a break-up play of a carve out, public debt, direct loans with near-term maturity walls, buyouts of businesses with negative EBITDA about to go to Chapter 11, and working on a take-private now. That said the modeling is always from scratch. There's no template that I can use for all/most of those investments I listed before. Trying to fit investments into a template doesn't work unless you're sticking to a substantially similar investment style (e.g., LBO, DL, public equity, etc.). Broadly speaking our investment process is similar to PE where we have a committee vs. pitching to a PM, however the take-private I found on my own on my BB terminal as a junior and pitched it to our committee so that would skew away form a typical PE internal process where you're contacted by XYZ advisor running a formal process. At the end of the day you're going very deep and having multiple conversations with the investment leaders (committee or PM) to come to a decision so I would say if you're good, you're doing the same thing no matter where you are.
I haven't worked at a vanilla direct lender so I can't say I'm certain of any categorical differences when it comes to a DL investment in my seat which would have a lot of hair vs. what they do (there's my disclaimer). From my understanding of vanilla DL I would bet our process is a lot deeper on the equity story given there's a much higher probability we would end up owning the business vs. a vanilla shop just hoping to get paid (we wouldn't mind that scenario either). In a lot of cases, we're coming in through the debt where we can command equity-like returns given the situation but we're very confident in our ability to execute a take over and turnaround if it comes to it. Very specifically, I'm running a full 3-statement restructuring case in our model (in addition to upside, base, and downside cases) where you're looking at how bad it gets to break and what you believe it would take to Rx the business and what's achievable in a turnaround. I'll caveat that there are a million ways a business can get handed over to a lender so the Rx case in our models has a 1 in a million chance of being the right situation but just calling out that we're giving it a lot of thought. I would also say our process is likely more detailed around legal agreements (mainly intercreditor given it takes doing down the cap stack to get the returns we're looking for so there's someone in front of you in line to negotiate with).
I mean it's pretty obvious what sucks about it: the returns across the board on a 3-5-10 year basis for funds investing in the space are awful for the most part (2022 was very bad for certain funds that deployed tons of capital into tightest HY market preceeding). You'd be better off sticking to HY market and focused on stressed capital structures with extremely low likelihood of default if you want to outperform what your LP gave you money to do.
The stuff written above all sounds nice until you make a 9 figure investment that goes the wrong way / cannot be exited without taking a bath or putting even more money in. Most public distressed guys don't think hard enough about how they will actually EXIT an investment, they just think wow it's so cheap to ENTER. Guess what, most LPs don't want shit bag reorg equities or illiquid unfinanceable soon-to-be shit bag reorgs. If you practice distressed over a long enough horizon, the rate of new illiquid ideas entering your portfolio > rate of existing illiquid investments being a fully exited. For every good credit trade where you got all your money out + 1.5-2x MOIC realized (which largely depends on financing market conditions + company being a real actual company instead of a shitco), there's many times investments where you initially invested in a debt instrument and now own an equity instrument that you cannot reasonably exit.
It's somewhat of dying industry with some growth/aggregation to firms that threw out any basic concept of good faith / fair dealing in screwing other lenders prepetition. Not sure how that's fun (besides reading about it when you're not involved) when you can screw someone in one deal then get screwed in another deal. It's incredibly frustrating actually to try invest in these situations because it's too easy to get screwed and pricing doesn't tend to implicate that binary behavior. Just becomes a stressful game of call every single person you know and pretend to be "ready to lawyer up" for a pending txn (queue "Gibson is working with lender group").
The illiquid comment applies to private distressed deals too - unless your firm is on a tear of AUM growth (which many experience when they're subscale and scaling), you need cash exits otherwise you hit inevitable wall of AUM growth stall and all your money stuck until a maturity / new lender takes you out.
It's a hard industry. Also have to be pretty damn careful to avoid the incredible assholes in the industry which there are many.
At a top distressed platform currently and don't really agree. The industry has changed, but is hardly in decline. Have the last few years of unprecedented low rates and low default rates been difficult for distressed funds? Of course. Have several funds still performed well and delivered double-digit returns? Yes. Oaktree flagship 11 is like what 12-15% IRR even after taking a bath in O&G in 14-15? I am at a more classic HF style fund which has 5-10bn in flexible credit and distressed capital, and our 5-year net return is just shy of 20% fwiw. We were up more than that last year.
More abstractly, there are going to be companies that become distressed and there are going to need to be credit investors to find value in distressed names, sort out the pieces of restructurings, invest fresh capital into distressed companies, etc. Especially with the massive growth in PE and lately the move to frankly opaque DL financing for sponsor deals. Yes, the days of trading short term into HY products of distressed companies undervalued by the market because of the stigma of BK is probably over. Fine, that was a relatively passive arbitrage strategy. Have changes in the law also made recoveries more dependent on fucking over others in your tranche / priming or pulling the trap door etc? Sure. But this isn't necessarily a bad thing. It allows a lot more creativity and frankly value creation for firms that aren't scared of getting their hands dirty and being active participants in restructurings, and have more flexible mandates to write new checks and evaluate different structures for the reorged entities.
I think the growth of special sits platforms with flexible mandates at the megafunds reflects this and some of the liquidity and exit challenges you mentioned. Moving to long lock-up callable capital structures makes a lot of sense and I think will make it easier for distressed funds to continue to flip to privates and bespoke structures during low default periods like the last few years. Those types of funds will also have the staying power to gut it out for recoveries in the hairy situations, which is good and important. But I think the growth in assets at the big platforms suggests that at least in that type of model, distressed is alive as ever.
Personally, I love distressed. You get to roll your sleeves and be your own catalyst if you're at a fund that's willing to get into messy situations. It requires and works a broad skillset. You have to understand the core business as though you are a PE investor (especially if your fund does loan to own, does in-court asset deals, etc), you have to evaluate classic credit cashflow and cap structure considerations, and have to understand both legal rights and negotiation strategy. I have a JD/MBA, and it's been fun to use my legal skillset too. Is it kind of stressful and very risky at times? Yeah, absolutely. You have to make big, long-term bets. But I wanted something like that. If you want a much shorter public equities style risk-taking structure then yeah distressed might not make as much sense though.
All your points are fair but you didn’t seem to address the elephant in the room: how do you EXIT a portfolio of “dogshit” to “not terrible” to “okay biz” as a whole? Fishing in a toxic pond I think is the euphemism.
I intimately know one of said Oaktree/SVP/Glendon type long lockup PE funds that is marking a distressed reorg that another more liquid / HF structure type fund holds at over 2x the mark. I’ve seen these shenanigans long enough to know that when the music stops playing and you don’t get to raise unlimited mark-to-model money that solves whatever IRR you want, it becomes a self fulfilling prophecy.
I absolutely agree that you need the right locked up PE fund structure to pursue deep SVP-type controlling distress mandate but this whole private/illiquid marks can be extremely deceiving and not at all comparable to a fund pursuing a true 2/20 model with majority of its book being able to liquidate at +/- the NAV they represent. Most people I know who get private carry in these locked up funds in lieu of cash bonuses don’t get much / got hosed / still waiting for cash distros. Deep distressed PE is pretty diff job than public liquid HF roles. There’s always going to be winners amongst losers, not disagreeing. Just saying what I notice amongst many participants / friends that it’s more bad than good than when I signed up to this eons ago.
Lastly congrats - a HF style 5-10bn fund with a true 20% annualized return is best I’ve ever heard of and it’s not even remotely close (hope it’s not Mudrick / NJOY though). You also seem relatively young (nothing wrong with that at all) given your Christmas 2018 post about ranking bulge brackets so that’s something to consider about your perception of industry / it changes as you age. I was once in your state of mind too years ago.
To be fair your perception regardless of how much you enjoy the concept of distressed is in part colored by your fund's performance wouldn't you say? Assuming your fund details are true, 5 year net of 20% returns especially at that scale is the 99.99th percentile seat in distressed as the other commenter noted. The avg distressed fund 5yr net return is like 6-7% pre 2022 drawdown and they're all either seeing declining AUM, lower fees, or replacing their HF money with CLOs. You wouldn't really expect someone who works in long/short equity to give you the same answer on how they view the career path if they're at Eminence vs some random $800mm fund where 1-2 years of underperformance means everyone might redeem and you're out of a job.
These are all precisely the reasons why I find RX interesting. I have a JD as well (considering an MBA), mind PM'ing? Would love to connect
This is a great and accurate post
Just bumping to get more content here, this thread can be a gold mine
This is a free market system.
Your point?
Posts like yours are inflationary.
If the thread is as good as you say, then a "bump" (i.e. stimulus) is not needed.
As an analyst/junior trader at a private regional providing flow and putting on some risk/hedging across the risk spectrum (govies to HY/Distressed/Non-rated), is there a huge hill to climb if I want to transition into an investing role like the what's stated above? I would assume my lack of pure excel modeling would be a steep learning curve, while my exposure to credit and fixed income may be a plus. I know that's not much information regarding my skills, but I have similar thoughts as the poster - what do you like about the public credit space? Can a bond trader make the jump? Are fund economics critical for making the jump worth it monetarily? Is sell side debt underwriting and distribution considered adequate experience? I'll likely be the least experienced on this thread but hey, that's why this fkin website exists right? thanks in advance
Another bump. I appreciate everyone's commentary and unique perspective
I am an analyst at a $1-$5bn distressed HF. Like many in the industry our returns have not been good and the amount of positive P&L attributable to process driven distressed (including out of court, exchange funny money bullshit) vs. IG, SPACs, performing / kinda stressed HY is crazy. As others have said...what is the exit in a lot of these situations? New paper that is still going to trade at 15%? Illiquid reorg equity in something that still won't generate FCF to pay dividends? 1L bonds at 70 with par asset coverage sounds cool but if you actually think about where new securities received in the process will trade 70 is probably fair value! Never mind what happens when you need to refi...turns out 95% of the book for refinancing exit debt is just existing holders rolling and little new money coming in. Remember, in credit you actually just want to get paid back plus a coupon...nobody seems to be doing "how do I get my money back?" analysis. Buying distressed bank debt in a process that is the fulcrum is more similar to making a minority equity investment in a turnaround vs. an actual credit investment (or "credit opportunity").
Meanwhile you live in fear of a surprise Reorg headline dropping some BS that you *might* have been prepared for if you had done your "check ins" with involved parties to know why some bond slid 3pts during the week. Every rights offering / new money plan is coercive, unless you are the silver points or gtrees of the world who put it together, and if you aren't liquid enough to participate then thats too bad you'll likely be left behind in economics, priority, information flow, etc.
It does get tiresome. Even with the increase in filings there is maybe one or two distressed / distressed flavored situations worth actually participating in per year. The rest of the time I'm perfectly happy owning sleep at night performing credits. I'm probably just jaded and a little burnt out; distressed was what I wanted to do in college and the playing field has changed a lot since then.
Appreciate this perspective. Would you mind sharing more about the job itself, stress, hours etc? I've wanted to do distressed since college (a few years out now), but man it seems like a tough place to be (not to mention to get a seat in the first place). I would guess the ratio of reward (in terms of returns) to effort is probably the worst in all of finance.
Do you think you would like it more if you were at a big shop that can drive process like a Goldentree or Elliot, or would that difference still lead to most things that you like/dislike being equal?
Probably not. That is trading one problem for another; namely, owning $400mn of a $1bn issue from a shitco credit that you are much more married too than some HFs $25mn position. At this point in my life I'm more interested in attaching where I have the highest amount of career convexity, and that is probably not SteerCo type public distressed.
I find the return on time and the return on risk capital to be relatively low in distressed credit. I wonder if there is a path to switching to something higher IRR / return on time? A decade+ of QE has transferred wealth from the credit/distressed people to the PE/levered long easier stuff people
Bump. Fascinating thread, keen to hear more perspectives.
Whats the best way for RX lawyers to transition?
Distressed has changed for good. Secular change. Larger check providers able to do private/privately-negotiated deals dominate. Diamater, Oaktree, VR, Goldentree, TPG AG, and the list goes on. Public distress will continue to "exist," but the players on the field will be swinging big, private bats. HY will continue to exist for HY investors. Sure IG will too, but that's an area probably ripe for headcount/seat optimization
Distressed has only gotten worse since I wrote many comments 2 years ago, I’m in at least a couple of LMEs that will just turn into illiquid dog shit on the other end, and of course being on the steerco was a previously badge of honor now turned a mark of shame.
Distressed is horseshit, don’t touch it.
Where do you see it going in 2026? How has your comp developed, ball park range?
I've been thinking about this recently now having the benefit of 10+ years in credit / distressed across all flavors of liquid performing to illiquid distressed / private equity. I can confidently say the industry barely resembles what I thought it would be / what it still looked like when I entered, and I don't mean it in a good way. When I was in college we had Moyer and learned about the absolute priority rule, waterfall analysis, and market inefficiencies that created opportunities in distressed credit. You would be hard pressed to find actual, live examples of credit ideas on the internet whereas its relatively easy now (does anyone remember the Distressed Debt Investors Club...?) Creditor on creditor warfare didn't exist. If a company went bankrupt value would go to the 1Ls unless junior creditors put up a competing plan to make them whole so they could get some value. It really wasn't that complicated.
Right around the time I started my career J Crew did its drop down transaction. While this was hardly the first instance of something like this happening it grabbed headlines and changed the way investors fought in process situations for worse. Now, the absolute priority rule hardly matters. A 1L loan trading at 70c you thought was absolutely money good and trading at a discount due to process risk is "first lien" in name only until junior creditors with debt at 40c decide to prime you with new money in an unsub and roll up their debt at a premium to market. Everyone lives in fear of a potential "deal away". No advisor in their right mind would recommend a company file for bankruptcy unless the wheels are absolutely off the rails - everyone has at least one LME in them, which in my opinion destroys more value than they create (most still end up in bankruptcy, but with a revised waterfall). Advisor fees have gotten out of control and also destroy a lot of value and FAs and lawyers are absolutely incentivized to figure out the most complicated transaction / punt the ball so they can get paid on the first LME, maybe get paid on the second LME, but then definitely get paid on the inevitable bankruptcy. That is all value that could have gone to creditors. CLOs I think have become some of the worst participants in the market and I don't think people focus enough on this issue. It used to be that CLOs would traditionally punt debt once it became distressed or traded below a certain price. Some of them still do, but it is far more rational and those prices tend to make sense (i.e., no one is punting a bank debt at a 2x cash flow create). Now, most CLOs have internal workout groups to drive credits through restructuring. Sounds for the best, right? Absolutely not. These groups are not incentivized to clean up balance sheets / position credits for success, they are incentivized to help the CLOs avoid mark downs, full stop. This is a hill I'd die on. Why do we have every flavor of "First Lien First Out, Second Out, Third Out, Fourth Out"? It's because its still technically FIRST LIEN! And the CLOs can mark it as such ("99% of our investments are first lien! (just don't ask what priority they are)". As long as they're paying interest they can keep these securities marked at par even when they trade like absolute dog shit in the secondary market. I think this destroys much more value than it creates and is an inevitability when you have creditor groups filled out by large CLOs.
I do think that the wider availability of credit and bankruptcy resources to the world is a net positive. Reorg (Octus?), Gatto's book, and other sources have done a great job spreading awareness of how credit investing works and I don't think we've ever had more young people interested in the space. I think it's great that nearly every university that would historically focus on IB/PE placements now have a credit or special situations focused club or organization. However, from my many interactions with kids coming out of these programs, the only focus is on LMEs. Drop down this. Unsub that. No one is actually thinking about credit fundamentals or if they are actually investing in good businesses and in my experience can't really even speak about the companies they're looking at specifically. So my concern is that the trends we see will only increase as these folks enter the industry.
Is all of this just the result of "cov lite" loans and fewer lender protections? I think a large part of it is, yes. But there has also been a huge shift in both sponsor and creditor willingness to play dirty in the sandbox. Apollo / Caesars is held up as the prime example of sponsors taking advantage of their credit docs, but if Caesars had happened ten years later I don't think a book would be written on it. Most sponsors these days are perfectly happy to take advantage of their loose docs, and there is a mindset of "my docs permit this and creditors agreed to it". This isn't untrue and I don't really have a problem with that view, but it is a big shift in posture. Creditors too have also gotten more comfortable with non-pro rata / priming transactions at the expense of other lenders. Look at the DQ lists for BSLs...they haven't changed in 10+ years and reflect who aggressive lenders were around 2010. Apollo, Appaloosa, Black Diamond, etc. Most are totally irrelevant in today's market. Memories are short, and the guy who screwed you today will be your co steerco member tomorrow.
Thanks for attending my Ted Talk. I still think I ultimately would go into credit / distressed, it is just a very different market than when I first entered. I'm not even sure how I would describe the current market to someone uninvolved. I work for a CIO who got their start in the early/mid 80s in an original cohort of distressed guys and to this day I'm still educating on how things "really" work these days when going through situations which is crazy.
Thanks for sharing! Super interesting how much the market has evolved in such a short period of time.
For reference: I'm coming from a non-target without a strong ER/CR pipeline or training.
I'd love some direction on how you'd start over building that foundation. How/what would you focus on learning/practicing instead of being swayed by the headlines and constant conversations of LMEs. Pertaining to "No one is actually thinking about credit fundamentals or if they are actually investing in good businesses and in my experience can't really even speak about the companies they're looking at specifically."
I'm very interested in credit long-term and want to make sure I'm developing the right foundation.
You have two sides of a company...the asset side and liability side. Most credit people myopically focus on the liability side and asset side analysis is rather cursory. Frankly, most credit people are really not that great of business analysts despite the adage credit people are smarter than equity . But to be fair, they don't really need to be most of the time. Just focusing on the basics will get you further than most...is this a good business, do they generate good returns on capital, are you aligned, do you have margin of safety etc.
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