Distressed funds with poor reputation
Recently interviewing/ networking and a PM at a fund commented that they would never work with fund X because “we take our words seriously, but they don’t really think their words count”. Basically sounds like fund X has a history of retrading people on deals and comps and are not generally looped in when there are good opportunities.
What are some distressed funds that have such a reputation? Don’t mind sharp elbowed people but more so want to avoid funds that are known to be unreliable / hurting their own deal sourcing.
Black Diamond Capital Management
The founder and the chief credit officer are known pedophiles
It’s funny, this fund that was being discussed (not black diamond) also has some senior level / fund level brush against the law (publicly known/ google able)
that’s a pretty serious allegation. do you have sources/links to this info? i understand the founder bought the island but that doesn’t prove wrongdoing
you're overthinking. focus on funds with decent returns. the question implies a lack of understanding about how the distressed market works.
Curious to hear what prompted them to make this point - think people are generally not in the market of shit talking other funds (even though there are ones people take less seriously)
Was talking about some LMEs and had some common deal touch point. The PM I was speaking with sounds like he’s experienced some retrading on terms from another fund (with worse performance than his fund) and was saying how fund X doesn’t take their own words seriously. Anecdotally I know fund X has that type of reputation from others as well (from different funds), people generally call them to offload positions they don’t want that went wrong but not the good new deals. Hence my point on being sharp elbowed is ok but having a poor reputation in the market is not. Both funds in this context are not “warm fuzzy” funds
When you're younger, cut your teeth at a shop with stellar returns and care about comp and culture second.
First, there aren't many funds that can constantly retrade and continue to put out top decile returns year after year.
Second, there's a lot of jealousy and a bunch of haters in the industry, so harder to generalize comments. Big red flags are usually pretty clear though.
what are big red flags to watch out for?
The typical red flags: blow ups, jr/sr turnover, withdrawals / difficulty fundraising, biz model transition (e.g. distressed -> CLO), lack of transparency when recruiting
Tbh. The fund that was being discussed also has pretty poor returns. Seem like they are not very good at finding good investments and need to resort into doing whatever they can
Castleknight? Clearklake if you count them as a distressed fund? CD&R if you count them as a distressed fund? Every MF sponsor other than Warburg if you count them as distressed funds?
I've overlapped with a former Castlenight analyst before and can confirm they are not great people to work with.
What’s so bad about castleknight ? Isn’t every distressed investor always trying to get a bit extra for themselves
Can confirm, some CD&R port Co's were shortlisted as part of a recent RX competition here in the UK
I know a MCC victim when I see one (I am too)
It’s unfortunate that credit funds have to be so hostile towards each other because of LME.
LME is a feature, not a bug.
This has always interested me. It doesn’t appear to hurt deal flow to the extent you would think
Agree.
hurts your ability to originate stressed opps in public markets? Hmm.
If HF is multistrat credit, in auction/private processes, you get looks with scale. Sell side traders aren't morally scrupulous if you direct flow their way. its a big boy market.
Last few years have ripe with creditor on creditor violence, priming, etc. DIP is usually supplied by incumbents.
The "good guys" who organize the inclusive lender co-ops so as to mitigate disparate lender treatment are doing so bc its in their best interest to be collectively aligned. If game theory suggests there is a more equitable outcome for their own self interest, the welfare of competitors is not considered.
People know people at other funds and if both are involved in the same situation, they compare thesis notes. if I don't like someone, prob wouldn't compare notes. Sure , some rise in PC capital solutions opps, but the only reason you share a deal with someone is if you don't have the financing to do yourself.
Sounds like dude is salty about getting primed or just doesn't like someone at Fund X. But I wouldn't say there is material adverse deal flow effect in distressed given public nature and due to the fact of the prevalence is aggressive LME over last few years.
I think poor reputation in this industry means lying about compensation/ recruiting, deception in negotiation / discussions, and maybe a distant third includes dysfunctional incentives. None of these things relate to how aggressive/ smart people are regarding LMEs.
There are also many funds that are always “involved” in transactions but don’t actually make money. In distressed, just having a high level of activity doesn’t mean returns.
A fund with good reputation - generally aggressive/ smart, comes up with ideas / solutions first, and get the first call when other top tier funds come up with a good idea bc they want to keep trading notes.
A fund with bad reputation - gets called when another mkt participant’s CLO team has a deal that they’ve held from par that is about to LME. Gets pitched the deal as a good “drive the rx” opportunity but was only getting called bc the fund called them need to assemble a relatively predictable steerco that they can maximize protection for their no longer par clo loan on. Doesn’t mean the fund that got the call can make money from their entry price.
Generally, the second pile of people are getting dinged by the market for having a poor reputation for wanting to “get more for less” - for eg, their own analysts may be quite bad and don’t know much, but always calling on others to get them to share ideas / insights. That’s one perfect bag holder for funds in a bad situation bc you can package the “opportunity” however you want and they will jump in without knowing the difference. Bad reputation also means how you treat / compensate- a few firms have a reputation for retrading offer numbers, responsibilities, and are always hiring because of that - that’s fairly different than firms that have turnover due to high standard. These firms in general will also have bad reputation. Last category is blow ups - in every blow up people take notes of who’s making what mistake and why, and if the reason is too laughable while the person displayed high ego for something that went ridiculously wrong, that’s also a bad reputation.
It’s like doing group homework - the free loaders, the ones who have no idea how to do work, and the dumb and arrogant ones are usually not the first call.
this doesn't make sense.
Maybe a naive question, but do distressed funds actually get in the weeds and fix a business/ address the root cause? Or is it just financial engineering? What exactly do they do? Interested in the distressed space but not sure how the different firms play in
Some of them raise a distressed fund using distressed only track records, buy what other debt funds / desks say are good, and make good stories for LPs
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