Open to any questions from people curious about the switch and my path to a distressed hedge fund. Background: graduated with a 3.7 from a semi-target state school, spent 2 years in direct lending then 1 year in restructuring before joining a public markets distressed debt fund.
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Thanks for the Q&A.
What made you pivot into a distressed HF and why distressed debt? I come from a similar background and I have people telling me to stay in direct lending but I am moving jobs and currently between three offers, RE valuations, RE debt, and a HF doing consumer NPL. My previous experience is in Senior Secured Lending which I find incredibly boring because we only stay in the senior loan space and am very interested in the NPL sector. Any thoughts beyond my question are greatly appreciated!
Did a few deals on Consumer NPL Portfolio side and realized Public Market distressed skillset is completely different then Consumer NPL..
Thanks for the reply. Could you go into more detail about the difference. Can be broad level but what analysis were you doing on the consumer loan? The way I understand the process is you buy a portfolio at a discount from a bank wanting to offload debt and risk, you manage the loans to either start generating income or fix covenants they’ve broken, and then hold for cf or sell off higher than you bought (but assumedly still at a discount to performing price). Anything you liked about consumer NPL? Any thoughts on longevity for career/exit opps/work life balance/pay? Big thank you for any information!
I was always interested in bankruptcies from my internship onward. I would say I just gradually found myself gravitating towards those stories, deals, etc. I had similar thoughts as you. Direct lending is a great career with great salaries and, usually, work life balance. I started feeling like all of the deals were similar and staying at the top of the cap structure doesn't leave a lot of room for creativity. I would think the NPL stuff could be interesting, but don't have a lot of experience with consumer loans. Name brand of hedge fund could be something to think about. I would also try to figure out whether you're doing a lot of portfolio / pool level analysis, or if you're diving deep into individual loans. The latter is more akin to what you do in a distressed seat. They're different skillsets, though each could potentially be interesting. Hope this helps.
Can you speak to the DD you did on the hedge fund? What things gave you comfort on the opportunity..what were some of the red flags you were keeping an eye out for?
The main things I focused on were AUM, years in existence, track record / public deals, team pedigree, and reputation with other investors in my network. The fund I joined checked all of my boxes so I felt comfortable with the opportunity. Some funds have a great sales pitch but their reputation is weak or they don't work on many / interesting deals. If a fund has been around a long time, keeps raising money, and has a good reputation in the market, it's at least a good start. I also really paid attention in my interviews, ultimately hedge funds have pretty small teams, for the most part, so I think it is important to respect and get along with your colleagues.
I hope you don't mind me trying to be comprehensive in my ask!
(1) Why public rather than private markets? (2) Even though you are a sector generalist, from the sectors that you have touched which excite you (and why?) (3) Is there an element during your tenure in your role that has surprised you the most (4) Do you mind sharing your option on different markets (if you have one) i.e. emerging markets (still from a distressed debt perspective) (5) What is one under the radar inefficiency(ies) in this space that gets you excited? (6) Have certain experiences (both personal and professional) molded your investment philosophy?
I like it, let's get into it:
1) Public is different. You have much less information than on the private side, so a lot of your thesis is built through conversations across the street, unconventional analysis, assumption building, etc. You also generally act quicker to avoid missing opportunities which may only be around for a short time, and it feels exciting being able to screen and act on publicly traded stuff. Private side is also interesting, I just spent the first few years of my career on that side so wanted to try something new. I almost think of it as trading based vs deal based, although when investing there is a lot of overlap.
2) Worried that will give me away, but generally I think sectors where there are opportunities for dislocations are very exciting. Think cruises and airlines when the pandemic hit.
3) In this world, it has surprised me how quickly people can act on investment ideas to avoid missing a thesis. Going from idea to pitch to model/memo to investing tens or hundreds of millions of dollars can take place in a matter of days.
4) I like US distressed because I know US bankruptcy law. It gets tricky in international restructurings unless your fund has people in that jurisdiction or your law firm you use has people familiar with the local law. One area of finance I think is cool is "special sits" direct lending funds, basically just private credit funds doing weirder, yieldy-er deals.
5) I think some IG names are going to be dislocated in the coming months, leaving some room to capture nice spread from less risky assets. That will probably happen before a big wave of restructurings occurs again, though I don't know how exciting it really is.
6) Some wisdom gained over the years: Never trust management. Everybody knows everybody especially in distressed. Most ideas aren't unique. Good pitching can take you farther than a good idea, and good ideas won't make up for a bad pitch to your IC. ThE mArKeT cAn StAy iRraTiOnAl lOngEr tHan YoU cAn sTaY SoLvEnt.
As someone who’s interested in distressed but doesn’t have an opportunity to start in restructuring, will be in corp banking, what kind of path do you think would be best to end up at a distressed fund?
I personally left direct lending after a few years and joined a restructuring seat. That almost acted as a stepping stone for a distressed investing role. I would think its easier to get into restructuring as a lateral, especially if the market is still hot in a few years. You need to focus on building the right skills - modeling, covenant / doc work (very important), DD, pitch building, etc. If I had to guess, you will probably have a limited number of shots at a distressed seat directly from corp banking, though you might get a few, but would have a much easier time moving to restructuring for a year or two and then you will have lots of interview opportunities for distressed.
I’m in a mostly performing credit seat now- how can I best sell myself for a distressed role? Aside from lack of experience with bankruptcy/rx, what are the major differences in the investment process, specifically when thinking about modeling (for case studies)?
I would say distressed in general is very doc heavy, so understanding credit agreements / bond indentures and different applications of various concepts in those is a good way to stand out. From a modeling perspective, very focused on where you create the company at current market values (assuming you buy the fulcrum) and being able to model out a pro-forma capital structure and recovery waterfall.
Can you elaborate more on the point you mentioned above regarding “I would say distressed in general is very doc heavy, so understanding credit agreements / bond indentures and different applications of various concepts in those is a good way to stand out.”
As someone working in an Associate seat at a Direct Lending Senior only fund what can I do to prep on the above..
Currently in direct lending, any tips on moving over to restructuring in terms of skills to emphasize/are transferrable, also could you talk about how you went about landing and doing interviews without previous IB experience?
I sold myself as somebody who was a great at financial modeling since I was already doing it to underwrite investments, and as somebody who was very facile with credit docs since I was helping to create them. I think these two things are incredibly transferable skills from direct lending to restructuring, especially when the world is melting and there is a demand for new junior RX bankers.
Can you give your thoughts on Ares' direct lending team and exits?
Don't know the team well so can't speak to exits but I think they have a good reputation. Working there you have the benefit of the Ares brand name and (hopefully) the LA sunshine.
I'm an incoming SA at BX/Bain/KKR/Ares on the DL team. Could you share how difficult it is to jump to UMM/MF PE from MF PC/DL? Would really appreciate your thoughts on this. Do you think I should jump to RX after my 1st year or do you think I'll be able to make the jump directly?
Sounds like a great seat. I don't think it's the most straightforward exit in the world going from credit to equity, but at the junior level I've seen people do it. I'm sure people do it at the senior level as well, I just think it becomes a little harder. You'll need a good story on why you're moving from one type of investing to another, because the mindsets are different between credit and equity investors, but the work at the junior level isn't overly different and you'll be working with those sponsors in your DL deals. I would move to RX if you want to do distressed investing. For PE, M&A is probably a more tried and true jumping off point, but I don't see why you couldn't do it from DL (and enjoy the lifestyle benefits along the way). Those are all good brand names.
Currently in MM PE (although in London) and looking to transition to distressed. I'd argue the heavy financial modelling aspect plus using leverage on a regular basis should amount to a decent profile, yet getting in front of funds is proving tough (might also be due to me not having banking xp in the first place, started as a PE analyst). What would you advise in terms of positioning?
I realize this is little info to go on, but let me know if I can dm for further detail. Thanks!
This was the same issue I had. I ended up doing a year in RX as a stepping stone, but other than that I'd say just be aggressive with networking and crafting your story. Find a mentor to help you craft that, if needed, but otherwise try practicing with friends.
What are your thoughts on Varde Distressed Corporate Credit?
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