Distressed HFs compared to Distressed Credit within PE Firms
I was wondering what people think about working for distressed HFs (Silver Point, Anchorage, etc.) compared to distressed businesses within larger funds (say, GSO or Oaktree distressed). The latter category has stable capital, with all the structural advantages that brings. They are able to invest in the regular corporate distressed situations that distressed HFs invest in, in addition to providing DIPs, opportunistic rescue financing, buying distressed assets, etc. (some distressed HFs do this as well, but to a lesser extent). However, it seems that people tend to prefer Distressed HFs, almost as if they are unequivocally better. I am curious to hear your thoughts on the topic.
A great example of the difference between the two is to look at how GSO (of Blackstone) has been playing the single-issuer CDS market. The larger "PE type" players are able to buy big enough stakes in situations to control the process and outcome and lend money to distressed companies. The more event driven HF players typically do not have the fire power to do that.
I started at an event driven HF in June 2013 focusing on distressed debt and one of my first situations was a Spanish gaming company called Codere. The company was running out of cash and was unable to secure an RCF from its banks. However, the company had some secured debt capacity and the view was that the company would find a way to raise short-term secured financing to plug the funding gap. A lot of funds sold 6 month to 1 year CDS assuming no default would happen in that time frame.
Anyway, along comes GSO, they decide to provide the company with secured financing, BUT, only on the condition that the company delays paying a coupon on its bond (thus forcing a technical default). It turns out that GSO had bought CDS in addition to lending the money so in effect they made money on both their loan to the company (10% coupon) and their CDS position. They have repeated the same trade quite a few times now.
Just one example of how having firepower can allow you to control/influence the outcome of a situation.
Ovechkin08 Seems similar to the GSO / Hovnanian situation. Any thoughts?
https://www.barrons.com/articles/congratulations-hovnanian-gso-judge-de…
A very blunt comment here... But one of the reasons people prefer the HF structure is the way comp works. I've seen a lot of people go the HF route because of the below...
People get hung up on the $$$ value of PE-style carry, but they don't realize that: * you will be on a 5-year vesting schedule * these days, clawbacks on carry are serious (you can lose all carry if you go to a competitor, even if fully vested) * the money comes late, often the bulk of it after 7 to 10 years * early outperformance can be bombed by later outperformance (and total returns then eaten by the preferred return) * depending on carry structure, you could get 100% fund carry which means that you get paid off the big pile and not for your deals
The advantage of carry was tax treatment. That is very much under pressure these days.