Distressed Credit vs. Equity Activism
I’m currently an analyst (<3 years) at a public distressed credit HF - getting inbounds for public equity activism roles. Have been interested in equity activism since college and while credit is fascinating / complex, it’s undoubtably a tough biz (complex investment ideas = 80+ hr weeks + mediocre returns, not bad by any stretch, but not that great - have a feeling both are the norm for many distressed HF’s).
I’m hoping someone out there has worked in both equity activism and distressed credit. How do you compare the two? In terms of long-term priorities, I (like most others) am probably more focused on compensation / returns (upside is important) + minimizing brain damage (which in my view, usually translates to slightly better WLB in the long-term - although this is a secondary priority for me at this stage of my career).
It’s potentially a big move and I’m hoping to weigh all the pros and cons. Has anyone here worked in both or is in equity activism now that has a view? My gut tells me that the inefficiencies in the distressed market (particularly in the US) have been mostly competed away, and that the industry’s returns will probably continue to be challenged unless there’s another big distressed cycle. However, I have no personal experience in the equity activism industry (aside from personal reading / case study).
I don’t see any recent threads on this, so figured I’d start a new one. Hopefully also helpful to others thinking about either path.
Distressed credit is just equity activism blessed by a judge, so personally I don’t see the big difference as someone working in the former
That’s a fair point, but does that overlook the differences in quality of businesses between distressed debt and equity activism? Usually businesses in the former’s world are very fundamentally challenged / in structurally declining industries / have a segment that has gone to 0 / etc. It seems that businesses in the latter’s world are generally of higher quality (which tends to lead to less losers and better returns, over the long-term). For context, our HF has returned LSD (roughly in line with our peers) vs. SP500 at HSD. I’m not sure how this compares to equity activism.
And while equity activism is process driven, to me it seems less so than in distressed where I spend weeks / months on ongoing work streams well after having taken a position. It’s been several months since I’ve dug into a new name (which is more interesting to me than ongoing process work).
Based on your experience in equity activism, would you disagree with any of this?
Bump
My impression is that companies often just ignore activists when they can. Distressed credit has a much clearer catalyst for change to actually happen (maturities / cash running out)
That said, agree with the point on business quality being higher for activist equity.
Distressed credit is also a lot less liquid so you can’t just put out a presentation and sell if the share price goes up.
Long term you should be where the incremental LP equity dollar is going. Hint: it ain’t activism. Source: me, a senior analyst at an activist shop
Interesting perspective. I think you’re highlighting an important shift—capital tends to follow strategies that show consistent, scalable returns, and activism can be capital-intensive with uncertain timelines. That said, activist investing still seems to have a role where governance or operational changes can unlock value, especially in underperforming companies.
Maybe the bigger question is how activist approaches evolve to stay aligned with where LP capital is moving, rather than disappearing altogether. Curious to hear what strategies you think are attracting the incremental LP dollar now.
Your gut is right. Melting ice cubes are likely to be taken private before they’re distressed, and with private credit, zombie companies can muddle along for a long time so there’s less targets for distressed firms in the US in general. For activism, by definition, half the companies are below the median. Depending on the sector 20-40% names in a sector have below median returns on 1, 3, AND 5 year time frames which makes the number of potential targets fairly large.
Buffet’s take on CEOs not being great capital allocators, promoted for functional expertise, etc. means yes, finance guys can still add value with better capital allocation and financial engineering.
In terms of quality, the meta for activism is now to turn so-so companies into good companies, whereas the meta earlier was to turn shitcos to not-so-shitcos. My explanation/pov on why this shift happened is that since 2010ish US public markets have specialized (US investor preferences changed) to support mid (some), large, and mega cap growth and quality companies, while good value companies and melting ice cubes tend to be gobbled up by PE. This means the SMID caps suffer from adverse selection and which is why there are many value traps there. This is also my pet hypothesis to explain why the size effect and value have underperformed over the last couple of cycles.
Distressed and Activism have always been two sides of the same coin. The former has more legal/game theory nuances while the latter has more governance/PE.
There’s many portable skills (negotiation/value/engagement/etc), which is why so many investors do both. Just take Elliot for example. Dan Loeb also started with junk bonds.
Not sure WLB would be any better.
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