I'm at the midpoint in my distressed hedge fund analyst career so thought it would be helpful to folks 0-7 years out of college as they navigate their career choices. Open to questions from folks interested in my path as well as distressed debt & credit investing generally.
Background
- Investment banking out of top 20 undergrad
- Started in restructuring, then moved to general M&A / sell-side
- Spent 3 years in distressed private equity then went to top 3 MBA
- Now work at a mid-sized distressed / special sits hedge fund for 5+ years
WSO Mentor
Want to work with me? Check out my profile here.
1) What's your view on the viability of a stand-alone independent distressed fund in the future? Many "distressed funds" e.g. Brigade / Anchorage have lost material Distressed HF AUM over the years, and supplemented their AUM with CLO money. Is there enough opportunities to deploy capital to support the AUM in the space?
2) Short-term or long-term view of the distressed market? Will it ever come back?
For context, I'm 10 years in distressed, and constantly have these existential questions when comparing returns at equity funds (or even the HY index).
Great question, I was hoping someone would ask something along these lines.
1) I think the model of a true standalone distressed shop is dead. There simply aren't enough opportunities to justify hanging onto large amounts of capital for a distressed cycle that comes once every 10-15 years - and with the implicit fed backstop, these cycles and deployment opportunities are becoming increasingly short. Flexibility is key here - yes, CLO money has helped, some shops have built direct lending practices, but I think the successful firms of the future will do both publics/privates and invest up and down the cap structure. Everyone is trying to do this to some degree - Oaktree is doing PE type stuff out of its opportunities funds, etc.
2) ST view - mixed, there's going to be pockets of opportunities in COVID impacted sectors - travel, real estate, consumer/retail but those opportunities are limited and have a lot of eyes on them. Simply, not much distressed to do when the HY index is at 350. LT - I think small to mid market players win here - those that are able to play in smaller TLA/B structures, post-reorg equities, etc. but the old model of a large distressed fund waiting to buy BBB bonds at 60c in the bottom of a cycle is over, in my view. There will also be pockets of opportunities internationally - some funds have found better success in sourcing there given more illiquid markets - more banks offloading B/S risk. Overall, lots of money chasing limited opportunities so as I mentioned above, flexibility is key
Hope this helps!