Q&A: 10 years at event driven / distressed HF
Ask away, happy to share. Worked across recent driven HF focused on credit but have done equities / options. Also, illiquid investments basic PE / PC
I’ve done credit in the past but not much lately. How annoying has it gotten dealing with generally bad companies and legal fights / getting screwed ?
Tons of great companies to still invest in outside of the melting ice cubes. The legal fights are challenging, but I would say most folks in distressed welcome this type of challenge and are in the business due to it. I think LMEs are more polarizing.
It just seems like there have been much easier ways to make more money in other strategies and asset classes.
That’s probably right. There are times where we look at a distressed company and boil down what bet we really are making (increased surgeries, xyz widget consumption) and decide better risk / reward in buying the equity of the $30bn publicly traded comp instead. If you can get paid the same fees for the “easier” investing, by all means that’s great and has worked out splendidly in the last decade+. Most ppl won’t get fees for mag 7 / s&p type investing.
think what bro is saying is lower fees on avg relative to other strategies like PE and you have to deal with greater headaches to generate a lower return. Your fund charges what? Prob 1.25-1.5% management fee and 15% profit share over a hurdle. PE fees are what again? Ok, so get paid more in PE on avg with less legal BS & workout minutia.
There are minimal full blown RX opportunities for control investors. So distressed strategy has fundamentally changed. Manufacture lender on lender violence then? Sick bro, that company will be in Chapter 11 or doing another DE in 18-24 months so enjoy your distressed exchange write up while you can. What is long term avg of historical distressed fund returns? Pretty underwhelming. Not talking about more recent vintages which are basically optimizing for IRR via stressed trading. More recent vintages will eventually revert closer to historical avg, just give it time. Funds can't even deploy all of their capital but not enough opportunities. That is a pain in the ass for LPs. There is an opportunity cost for keeping idle money parked in liquid investments to fund capital calls. So your investment period is 3-4yrs and you called 50-60% of capital? F**k me sideways. Should factor that idle capital into the GP's fund return.
You should have a distressed guy at each HF to capitalize on opps as they arise, but saying the asset class isn't what it is hyped up to be.
Yeah, fully agree on this. From a standpoint of, you need to have a flexible enough of a mandate. Distressed is usually a part of someone’s book, but not the whole. I think it gets more interesting when you get to look at a company / balance sheet and see what’s right for it. Maybe it’s a convert. Maybe you like the equity. Howverc I think starting a career learning the basics of distressed investing is great. Teaches and touches lots of different areas of fundamental analysis, trading, legal, and structuring. Credit investors see doom and gloom. Equity sees blue sky. Good distressed investors usually have to toggle between the two.
Hi I’m a junior at an Ivy incoming at a credit hedge fund on the distressed team. Is there anything to keep in mind or read or prepare before starting especially as an incoming analyst? I’ve read pretty much every book and every podcast and I’m up to date with all the latest cases and trends.
I understand that a lot of people shit on the industry and cyclicality, but I love the convexity and complexity and overall breadth of the different types of deals.
find a mid cap equity name and start developing a good view on it
Awesome, congrats. Sounds like you’ve read all the typical books, and have probably already read Gatto’s credit investor handbook. I think that’s a great resource. Another one, is Pavel Kumchev’s solving life, but it’s less credit focused and more cheap options as a way of viewing life.
Take a look at some of the latest big distressed credit names (BHC, Dish) and get an understanding of the situation. Outside of that, enjoy life pre-start. Most important is going to be a learning centric attitude once you get going.
Thanks for doing this!
1. How would you view a distressed seat (as a junior) at a BB (GS, DB, MS etc.) as a desk analyst vs one at an estsblished fund in terms of comp/career trajectory, exposure and overall skillset acquired?
2. What would you say the priorities would be in a process out of the following (please disqualify/ add any if applicable): Business quality, cap structure/ creation multiple, fulcrum security, covenants.
3. What are the hard skills you believe to be essential for someone entering a distressed / event driven seat? And what are the skills you’ve noticed the best analysts you’ve worked with have?
Thanks again!
Bump 3rd question
1) Pretty similar overall. I think the desk analyst seat (caveat never having done it) is great for getting lots of market exposure. You hear thesis from lots of different funds and know how different investors think. It’s a bit more salesy, naturally. But can be high octane and obviously a bit more trading focused. At a typical distressed fund, you’re not following EVERY single tradable dist / hy name, so it’s more concentrated and you typically go a lot deeper into credits. There’s also more portfolio management considerations. Comp-wise, BB pay out a lot more stock and vesting etc. If you’re at a distressed SM fund you’ll probably have better cash comp in good years. Lower turnover means you won’t move “up” as quickly. But it also means the team learns how you think about credits / risk and it becomes easier to get names into the book.
2) Not sure I track what you mean by “priorities”, but you definitely need to know all of the things you listed. I guess on an initial pass maybe you just have a cap structure and quick biz / situation overview, which helps guide the discussion. But there isn’t one “priority”. More so how do you put the puzzle together and what is the risk / reward for each instrument.
3) Ability to unbiasedly see various viewpoints. If you are buying something, that means someone is selling. Why? And it usually isn’t just, oh a CLO is scared to do the work, which is an excuse that gets used a lot. Those are smart guys across the table and understanding the bull and bear thesis is important. Negotiations skills and understanding everyone’s incentives in restructurings is another one. Everything else is probably similar to other fundamental investing (understanding business, industry, trading dynamics, etc.)
Lotta sell side distressed desk take directional bets too. Some of them even function more like HFs than flow trading desks
Do you know which desks/banks function like that?
What has been similar vs different across the different strategies that you've seen? How would you differentiate between the personalities best suited for each?
Thanks for hosting this!
I would say hedge funds vs PE style investing is very different. HF skill set is really, how quickly can you make probability based decision that is good risk / reward. Quickly not just in terms of time, but in terms of dismissing noise and getting to the meat of it. PE (and PC) is more about having all of your bases covered. It’s also more about structuring, relationships, operations.
I always viewed it as hf analyst can sit in a dark closet and look at numbers all day and come up with thesis. PE is more rubbing elbows and walking the manufacturing floor. These are gross exaggerations but showcase my view.
Can you talk about what the interview process is typically like for a fund like this for someone coming from banking or PE? Much has been written about L/S equity interviews (pitches, etc) but curious how it differs on the special sits side. I know there probably is not a “typical” process but any color would be useful from a preparation standpoint (is crafting a pitch a good use of time? Will it be deal experience focused? Is there a technical round? What things did you look for/care about?). Thanks in advance.
As you pointed out, the process varies dramatically. I’ve had everything from IQ tests, math tests, personality tests, quizzes on working capital, to bond math. I wouldn’t say any of this was typical.
Typical to me is:
This is every HF interview I’ve had
Would be curious to hear about what parts of the job/types of trades still get you the most excited to get out of bed in the morning (now that you’ve probably been through reps across your mandate a number of times at this point). Thanks.
I currently have a very flexible mandate. Can look across Publics or privates, debt, equity, activist, options etc. I find that pretty fun, although specialization has to be a more efficient method. I honestly find it all pretty intriguing. Looking at a new business and understanding what it does, how it came to be, and what went wrong. Thinking about the future of it. Going through legal and negotiating dynamics. All of it is pretty enthralling but it depends on your own interests. I definitely feel like I’m still learning, which is great.
Hey sounds like an awesome gig for someone intellectually curious and willing to invest the time and effort. Congratulations!
Can you speak on your process a bit (i.e., from never having heard of a company / limited knowledge to putting together a model and thesis)? Is it much different across credit/equity? My question is more so publics focused btw. Wishing you nothing but good health and $10bn.
Usually for credit, it’s looking at Octus / debtwire or some similar news rag to get the 10 min take on the company / situation. Then flipping through public materials (latest investor pres, 10k, etc). Look through sellside research. All of this to get a sense of the business, cap structure, situation. Usually by that point you’ve identified a preliminary thesis (biz trades at 5x but has lots of liquidity and investing in xyz) even if it is absolutely wrong. The main thing I try to get to is what is the general bull and bear thesis, and what’s the up / down associated with it. This helps identify what type of bet this can even be, is it a long shot 10x type equity bet, with limited downside, or is this a super safe I think 10 points down on the bonds but 40 points up. Also figuring out, is it a cheap option type strategy or a I think I know what will happen and want to bet on that.
Once you have a preliminary thesis, you go through typical channels. Speak with company, competitors, consultants, other funds, sell side desks, everyone, and get more granular on your up / down. Usually along the way you’ve build a model to understand the various drivers of the business and how sensitive the operating leverage or cash flows are. You also spend quite a bit of time on valuation and how to actually realize valuation.
Realizing valuation is a huge one. Tons of stressed names stay cheap forever. Even low-rated B credits that are there for a reason (small, esoteric) will never trade in line with the index on spread basis.
Based on your experience which players in the space do you think are standing out vs falling behind? Looks like SPC, ShortHills, etc. doing well recently especially with echostar 4x
Not sure I have a ton of insight here. Golden Tree consistently puts up great numbers. SPC does too. Castle Knight had a few good years. Arini. Redwood has raised a lot of capital recently. A lot of funds have PC arms or CLO arms that help smooth out earnings.
Nut Tree has been doing very well too
I am wondering what the process looks like from a t1/1.5 RX shop (EVR, HL, MOE) including the sorts of technical understanding needed and if you have people at your fund that comes from these places. Thanks!
Usually the restructuring groups at banks are great training grounds for understanding the various players and incentives involved, cap structures and initial screens of businesses. From banking to buy side, the key differences are really how granular you need to get on really understanding the business and the business model, and understanding putting risk on. On the first part, a lot of things are taken for granted on the banking side, but when investing, you really have to question everything a bit more. Xyz is industry leader. Why is xyz better? Is it that they’ve spent more capex historically? Better management? Better locations? What does that translate into margin? How quickly is that “better” eroding. You’d just really dig into the “fluff” statements to understand. The second part is risk, and really conviction. This isn’t something banking can really teach and this is why sell side traders excel at HF at times. They understand when they know or see something that the market isn’t fully appreciating. Knowing when there is real conviction vs not. That typically develops a bit later for banking type.
Great, thank you!
Thank you for doing this. Great insights. What are your views on some of the players that are focused on private distressed situations (King Streets tactical fund, Oaktree, Apollo, Blue Torch, TCW, Silver Point, Centerbridge, MGG)? What is your take on their increased presence in the market?
Also would be great to hear your take on a seat at one of these private strategies vs a more traditional distressed / special sits hedge fund seat if you’re in a more junior position trying to build a skill set. Thank you!
Interested as well in overall view on these names
I’ve probably dealt with every name on the list except MGG and would say any of those should offer a great learning experience, if you’re interested in the private side. Private investing is a different skill set, but you learn a business and docs well. Public side is a lot more of I see x as value, and [earnings, bk, m&a] is how the rest of the market will agree on my view.
Any thoughts on public vs private going forward? Do you see the private side taking share as we have seen with liquid credit vs private?
What’s your take on Thames Restructuring process? Are SPC / Elliott underwater? Or is there tangible and achievable convexity on their thesis?
Thanks!
Hi, thanks for doing this!
How do you weigh the trade-off between roles that are strategy-agnostic but industry-specialist vs. vice versa? You mentioned that distressed should be a tool under a credit HF's overall strategy to be deployed opportunistically - would you recommend optimizing for roles that are more flexible across the mandate of the health of companies you would invest in then? Currently deciding between roles that are flexible across performing/distressed but within coverage groups vs. distressed-exclusive seats that are industry-agnostic. If the answer is picking the former, are there any industries you think would set you up the best for long-term investing and optionality across investing in different asset classes later?
Thanks again, and wishing you the best!
Research has definitely improved markedly over the years. I’ve seen some research reports that capture my investment thesis almost in full, and make you feel a lot less value add. However, a risk taking seat is not only about research, but also about ability to size, conviction level, and trading dynamics. Ability to buy more when an investment is down significantly, vs sell when risk/ reward gets skewed. Also, research is typically just the starting point and a lot more granular work is done before investments are made.
I personally like more of an equity, special sits, and distressed debt combination investment platform over a performing / distressed debt seat. It’s just higher octane, more margin of safety type investments. I also think performing credit is an AUM builder but risk taking in special sits is more interesting. I’m fully in the camp of distressed debt with industry agnostic to really learn how to invest in theses businesses, and later on maybe specialize some more. It’s a lot easier to go from distressed investing to do some performing as well, vs vice versa.
What’s your event driven investing style? How would you describe the spectrum of event driven type of trades you do?
What’s your process in getting to a probability number?
Is probability included in your risk/reward score? How do you include it?
Thanks much!
Distressed debt, special sits credit, deep value equity, litigation, convert arb. Flexible on looking for high moic type investments.
Probability analysis for scenarios is a major part of the job. How to come up with probabilities? It’s based on all the investment factors. Building conviction based on those factors gives you the probabilities.
The is great. We have so much overlap. How do you think about delta for converts?
Thanks for doing this. Any idea of where Beach Point’s and Canyon’s distressed teams sit in the landscape?
I see Canyon more than Beach Point on distressed names. I know Canyon was more focused on performing side not too long ago. But I don’t really know what they are up to now. Both firms definitely have real distressed capabilities and are great training grounds.
Thanks for this! I’m an analyst in a credit investing program doing performing and stressed credit.
I’m interested in moving towards a more interesting mandate (still within investing), but am not really interested in mastering the legal side of distressed investing. As a result, I’m finding myself most drawn to opportunistic mandates (flexible public+private debt and equity).
Curious your opinion on:
- If there is a most “optimal” path to an opportunistic HF mandate (ie., should a junior move ASAP, or take a few years in larger funds with more structured programs first). (Obviously one would argue there’s no singular path, but curious your opinion on if there’s a best way to do it)
- Who the top funds are that are truly flexible public private cross cap (when I talk to recruiters, I get the sense that most funds are pretty siloed now)
- Also please correct me if my assumption that there are opportunistic / event driven funds that aren’t focused solely on distressed
I think in most cases moving earlier into the type of work you want to do is advisable. The caveat being if you’re unsure, you don’t want to take a role that is very niche and pigeonholes you.
Opportunistic public / private without a distressed bent is a little challenging for me. Usually those that invest in opportunistic / stressed credit or higher yielding public / private names still have a pretty good understanding of distressed. The reason for this is because most of credit underwriting is understanding downside (both in businesses and in the investment) so they tend to have that skill set. I think most large credit funds have the type of platform you are referencing, private / public credit investing. But I agree that most are siloed at the junior level. If you can find commingled funds that switch between the two maybe that fits your bill, but those tend to be smaller funds that are just going where they see most opportunity.
Thanks a ton of the response. It makes sense, distressed seems like a good training ground and the foundation of where most of these special sits funds come from
To your point, I do see a fair amount of public + private credit, but rarely do I see that + equity as well
hi - any thoughts on navigating career transitions in the space? where would you be looking (or avoiding) if you had to change firms? slightly junior to you and have similar breadth of asset coverage historically
I don't follow fully. Career transition to where? Where do your interests lie?
I think overall being on a lean team at a really good SM with good PM is the best experience since you are very hands on. You own the entire investment process but also have some guidance from the PM. Typically it is going to be more investing less trading. I think that's one of the better experiences to get but again, depends on your interest.
Hi there thanks so much for doing this! I’m at a RX shop as an analyst and am extremely interested in stressy-cross cap investing. I understand many of those seats are filled with people who go through RX to distressed to broader mandates. I had 3 questions (and I’ll try to keep it brief):
1) How do you recommend approaching that first investing seat role post-banking? Is there a ranking of firm you’d prioritize in an order/a framework by which you’d aim to land?
2) I want to have a bunch of of solid pitches on topical credits in the space working; I find that what is easiest and most familiar for me is doing the operating-investing diligence on a name (ie 10k tegus earnings calls broker reports forming my own few on go forward business performance) and spreading credit docs/building cap table and corporate structure. I don’t, however, understand how to think through where in the cap stack it’s best to invest, especially when these distressed situations get wildly complex down to case law precedent targeting languge in the credit doc? I’m sure I’m overthinking but would truly find it impactful if you could share your framework to post- understanding the situation, th credit, and valuation of a business how do you atually investing in a capital structure strategically?
3) Jumping from RX banking, any skills/spots that you see most candidates lack or are weak on?
Thank you so much again for doing this!
1) For your first firm, I think you really want to learn how to value a business and understanding risk / reward. Those are the most highly transferable skills. You want to seek a place that puts an emphasis on fundamental value rather than trading heavy. Typically, larger firms have more of a culture of teaching or training but lots of smaller SMs are good mentors too.
2) Different folks have different strategies. A lot of funds buy the top of the cap stack to control the process, then buy convexity. Loan to own funds typically want to buy the fulcrum. Sometimes you’re buying and out of the money option because it is mispriced. So, in reality, there are quite a few strategies that can make sense. The way to evaluate is by looking at risk reward for each instrument / security in the context of the various decision tree outcomes. For example, if you think xyz company’s earnings might deteriorate in the next several quarters that leads to a liquidity need, which securities reflect this? Which have the most convexity to your thesis. The seniors may be pricing in a par recovery, but you might think that the liquidity need is going to result in a layering of the seniors with additional capital, resulting in the loan to value to increase. Maybe you want to short the seniors or buy cds in that case. In any scenario, you have to think through what if you’re thesis is wrong and the company’s performance doesn’t deteriorate or improves. Do the seniors have more room to tighten? Typically you’re looking for asymmetric bets, and if you find them with good probabilities, thats when you start loading up. Another example is buying out of the money juniors in a cyclical business that has runway. Valuation maybe change dramatically if industry dynamics change.
3) The mistake I made was assuming things as fact when really everything should be probability weighted and changing. XYZ is a good business and should be valued at 8x. Just realizing the volatility in the underlying business and credits makes you appreciate a range of outcomes more. At the same time, putting up the beautiful data tables that bankers have is really useless on the investing side. You’re paid to figure out what you think value is and where to buy / sell something, not to just show all the potential outcomes. I know those two thoughts sound contradictory but I believe that’s how it actually works.
Thank you so much - this is extremely impactful. Especially on 2) - am I understanding then a framework to maybe build off of is 1) starting with an “operating” thesis (ie having a view on business fundamentals, valuation, and drivers of security prices) and then 2) building a few on the broader capital structure situation and dynamics (ie capital structure, corporate structure, trading prices/YTM), and then 3) searching for asymmetric risk return positions?
Also, something that’s daunting to me is building a framework for understanding potential LME/restructuring outcomes (being on RX banking side I find that each deal is so complex and different that at some point it’s almost like I’m scrambling to learn new things on every deal). This feeling extends into analyzing situations where a lot of times I have a rough idea of how to perceive a credit, and then I realize that in my mental decision tree, I completely forgot to consider a viable outcome which switches recoveries around meaningfully.
Any help or guidance on whether this is a) a valid /common concern for a junior? b) how to better build comfort (I’ve been reading as many RX cases as possible to maybe build case precedent muscles)?
In any case, thank you so much again for your time and help!
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