Distressed credit - public vs private?
Hey all - how did you think about public vs private credit especially as it relates to distressed opportunity?
I’m currently at a shop that invests across the capital structure and strategies (LBO to distressed) but want to move to a purely distressed credit firm. One of the things I’m hung up on is whether to pursue distressed through public or private means. I guess private distressed is more special sits / capital solutions as that doesn’t really exist.
looking forward to your thoughts
Based on the most helpful WSO content, the decision between public vs. private credit in distressed opportunities involves several key considerations:
Control and Influence: In private distressed credit, investors often have more control over the restructuring process and the strategic direction of the company. This is because private deals typically involve direct negotiations with the company or its stakeholders. In contrast, public distressed credit usually involves purchasing bonds or bank debt on the open market, where the investor has less control over the company's operations.
Information Access: Private credit deals often provide access to more detailed and proprietary information about the company's financial health and operational strategies. This can be a significant advantage in making informed investment decisions. Public credit, being more transparent and regulated, might offer less informational depth, particularly in real-time or sensitive scenarios.
Regulatory and Compliance Requirements: Public markets are generally subject to more stringent regulatory requirements, which can affect the speed and flexibility of distressed investing. Private markets might offer more flexibility but come with their own set of due diligence and legal complexities.
Market Dynamics and Liquidity: Public distressed credit can offer greater liquidity, allowing for quicker entry and exit strategies. However, this can also mean greater volatility and market-driven pricing. Private credit is typically less liquid, which might result in longer holding periods but potentially higher returns due to the illiquidity premium.
Risk and Return Profiles: The risk-return profile can differ significantly. Private distressed opportunities might offer higher potential returns, given the higher risk and longer involvement required to turn around the company. Public distressed credit might be seen as less risky compared to private, due to the liquidity and the diversity of instruments available (e.g., senior vs. subordinated debt).
Deciding between public and private distressed credit paths depends on your risk tolerance, desired level of involvement in the restructuring process, and your career objectives in terms of the types of environments and challenges you want to navigate. If you're leaning towards deep, hands-on turnaround situations, private distressed credit might be more suitable. On the other hand, if you prefer dealing with market-driven strategies and faster-paced environments, public distressed credit could be the way to go.
Sources: Distressed vs. Credit vs. Special Situation vs. Turnaround PE, Distressed vs. Credit vs. Special Situation vs. Turnaround PE
Bump
Public distressed is definitely sexier/more-interesting in my opinion. However, public distressed as we know it is a dying industry for a myriad of reasons. From a career perspective, you want to pursue special sits / capital solutions, which is growing rapidly fueled by private credit shitters like you. Public distressed seats are shrinking and returns have been shit over past two decades.
agreed— finding a seat where you can do public distressed opportunistically and stressed l/s is the sweet spot imo, but there’s very few seats like that anymore
In my view, most public distressed seats are transitioning to what you're describing so not as rare as you may think. I still think it's a shit sector to be in. Whether they admit it or not, those opportunistic public stressed / distressed cross cap stack seats always end up having a return they are solving for and most of those funds have not had great returns compared to their benchmark.
Sorry, why would you move to a more limited strategy which has underperformed for most of the funds? You want to maximize your returns, which then leads you to pursue a more flexible mandate. Unless you only want to do 1 strategy for personal reasons.
Really because distressed is way more interesting than the other two for me. If there is one place I want to spend more time, it’s that but unsure if there are real seats…
Most large “distressed” funds already oscillate between the two strategies. Most funds now have some combination of both close-ended draw down vehicles and open-ended funds that allow them to pivot their strategy depending on the market conditions. Therefore, away from pure play uni-tranche/direct lending type that only look at private credit like you said, there are a lot more seats out there today that expects you to be able to do both - i.e. negotiate a term-sheet for specialty finance but also have a view on secondary/liquid opportunities
FWIW, I think it’s a great sector to be in (without trying to sound like I’m justifying my own existence) and the movement towards shifting between public/private also means that returns can be more consistent with lower volatility, as a typical book would have a baseline level of good quality but large-ticket private credit instruments that have a carry of say 10-12% that then gives you a bit of cushion (as you effectively “bank” those P&L already for the year) to go out and look for higher returning “distressed/stressed/event-driven” liquid secondary opportunities. The skill sets are quite different but complimentary in my view, as to be good at the public side you need to have a broader view of the market and take risks without perfect information, but allows you to have a better feel for where things should price on a spread/yield RelVal basis and occasionally dust off your Rx toolkit when things hit the fan. This contrasts with the deeper DD and more abundance of information in private deals, but also allows you to say “oh this 12% opportunity today that locks up my capital for 3 year just isn’t as attractive as the 15-18% I get in the public market that is more liquid and I can recycle capital quicker”.
Interesting - thank you for sharing.
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