I am interested in identifying a list of the top 20-30 distressed debt / special situations groups on the street. I am industry and geography agnostic. I am solving for: (1) learning outcomes, (2) compensation (3) prestige. I am less concerned about (1) ability to grow within the organization (two year program is fine) (2) specific industry focus (3) culture.
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This has been posted many times before:
Elliott Management Aurelius Capital Solus Alternative Fir Tree Partners Brigade Capital Angelo Gordon BlueMountain Oaktree Capital Silver Point Capital Canyon Partners Davidson Kempner York Capital
https://www.wallstreetoasis.com/forums/most-active-top-distressed-hedge…
https://www.wallstreetoasis.com/forums/top-distressed-funds
BTW, no one cares about prestige. You care about reputation in distressed investing stemming from actual experience dealing with such parties in an out of court or chapter 11 process.
As an FYI, this is a fairly out of date list. for example:
Solus is winding down and halted redemptions after losing a very substantial amount of money over the last 3 years, something like 30-40% cumulative, maybe more post the recent sell off. There’s an interesting WSJ or FT article about it. Owned a lot of illiquid energy that ended up being complete garbage.
BM shut down their credit hedge fund last year and sold their remaining operations (CLOs mostly) to an insurance company. Also awful performance.
Firtree is a shell of its former self in terms of both AUM and headcount, lost a ton of money in energy.
Brigade is mostly HY and CLO capital, not comparable to the others.
York shut down its core distressed HF vehicle after poor performance and large redemptions. They do some distressed out of their multistrat funds and some pockets of drawdown capital, but most of their dedicated distressed capital is gone. Good WSJ article about it.
Aurelius is much smaller and has lost a lot of capital from its peak. Some interesting headlines last year about how the founder married one of his senior analysts who’s now the #2 there. They garner a ton of headline from their bomb throwing tactics and are clearly smart/creative, but don’t have the scale to take big positions in large cap distressed situations. https://www.bloomberg.com/news/articles/2018-12-19/wedding-bells-at-aur…
In general, I would classify a “large” distressed fund as one that can allocate 5bn+ to the strategy, or regularly take 100mm+ positions (market value not face) in situations, which is important to being in a position to drive restructuring processes. There are maybe only like 15 other funds that would fit the bill. Elliott is generally viewed as the largest and most sophisticated process oriented investor in the space and regularly takes 1bn+ positions in distressed situations. Their AUM generally limits them to only large cap situations so they need to be creative about extracting process value from situations. However, their distressed returns have been poor as of late because they simply bought bad business (tends to be most of the companies in distress in late cycle, for obvious reasons).
Other funds investing out of multi strat funds but that have traditionally allocated significant capital to distressed include Baupost and King street (latter facing big redemptions).
A few other funds with very significant distressed capital but not necessarily known primarily for it include GSO, Centerbridge, and Apollo. Kkr does it too but to a much smaller extent, Carlyle even smaller.
Have any of the large guys done well in recent years? My understanding is that basically everyone has had it rough in recent times.
if you worked at a reasonably sized fund you should be able to see the returns of your peers. it's pretty publicly (though pay-wall'd) available whether through HFR, eVest or even HSBC.
Some of the "top" performing 3-yr annualized track record (not counting 2020) funds are:
Other funds up there that i'm too lazy to pull records for include Diameter, Taconic, Redwood, Knighthead (ignoring 2018/2019 where they did HORRIBLY), Whitebox, Contrarian, Apollo (their main ~3bn credit HF + obvi their PE group that plays in same space). Sure I'm missing some random 1-3bn players in the list. Some funds run a levered strategy of their main flagship that i also included (Whitebox is known to run levered, Taconic 1.5 etc.) but aren't really as comparable.
There isn't a "Goldman Sachs is better than JP Morgan" ranking of HFs for good reason. That original list was just a copy paste of one of the 2015 topics and I made a further topic that broadly lists almost all the relevant players in the space. You can pick and choose your "Solus getting redemptions", "BlueMountain shutting down" or King St/Anchorage/blah blah losing aum....I'd argue that you'll be hard pressed to find any "good news" about many firms outside a select few like an Elliott or a successful launch like Diameter.
End of the day, if a firm is growing AUM and expanding as a business that is a very positive sign as they will remain relevant players in the space. If they are contracting from redemptions/irrelevance in the field, that is relval-all things considered, a "worse off place". The larger credit managers, whether you think of Canyon, GoldenTree, Oak Hill, DK, Brigade, MF credit arms (Apollo/KKR/Ares + OAK / Centerbridge etc) have done well for themselves in that regard.
The small firms that haven't turned into Solus are lucky that they didn't make one big concentrated bet in a really shitty credit, that's really the key difference.
I feel like Anchorage definitely has a dedicated distressed team? Maybe they are a little more fluidly structured where HY analyst rides along with distressed team when their names become topical. In another vein, I thought GoldenTree was structured very similar to Brigade? Do they silo their research team? What other shops do people know of that have a single research coverage structure across all strategies?
I've always wondered that about Brigade and such structure. In theory, I think it is a great strategy. You have analysts who have visibility across their entire industry they can carry over from HY coverage, detecting early signs of distress, and ready to act quickly because you already have an informed view. What doesn't get discussed is often pure distressed analysts miss the long-term trend because they are trying to get up to speed in a hurry only AFTER the credit becomes topical. So you get this phenomenon of all the run of the mill distressed analysts all chatting about the same 10 names that traded down 2 weeks ago, "compare notes" with the same generic canned view, and crowd into the trade. Esp. with private companies (majority of loan market today) , you are working with significant informational disadvantage this way. On the other hand, a GOOD (emphasis) performing analyst will have the benefit of following the credit for 1-10 years, notes on all the issues the company has faced historically, and what they are seeing through from competitors or supply chain players in the same vertical. However, they often don't have a mechanism through which to express this likely better-informed view given the default position (no pun intended) for performing mandates is to punt the credit once it is headed to restructuring to cut the losses and move on (some exceptions to this)....
But I can also see the dual-mandate being a huge labor suck. You probably shouldn't be covering more than 30-40 credits if you want to leave time for deep-dive work on the distressed side -- which would require a huge staff/headcount at a firm size of Brigade (CLOs hold 100-200 names in each vehicle). Also, I don't know how you balance out the conflicts in a restructuring since performing fund incentives (par recovery) will often diverge from what is good for distressed fund (equitization/value transfer away from existing security).
Anchorage like most firms have a few senior guys that will be in charge of the more high-profile restructurings. Lots of legacy 1990’s-founded firms are setup this way because senior MDs become invaluable to the firm and the firm gives them leeway to “work on what they want”; otherwise it’s usually a team loosely follows industry-experience with some sr. analysts sometimes being in charge of two somewhat unrelated industries (i.e. a Sr. Analyst covering both industrials and mortgage REITs).
I generally agree - I don't cover new issues but getting up to speed on the loans last month with only a CIM + barebones quarterlys is certainly a disadvantage compared to the guys who have been on all earnings calls over the past years, spoken to sponsor from deal launch to day of loan trading in the 60s. Anyone who tells you otherwise is just being arrogant (yet their returns continue to suck and I know that for a fact because I don’t see anyone with GOOD enough returns to back their arrogance).
What a CLO analyst lacks is (i) depth of focus on particular credit because their universe may be stretched too thin and (ii) inexperience with bankruptcy process or out of court game theory. That is where a firm with true experience in distressed can add significant value whether that be non-pro rata controlling DIPs or selective uptier exchanges combined with more interesting trades like CDS orphaning (or otherwise significant-widening credit event).
Longer-term a firm with both skills that can allocate capital between many vehicle and strategy structures are advantaged which is why all major credit players have grown into multi-strat firms that have either a dedicated research team for covering new issue credits by industry or single-research teams (it sounds like Brigade Anchorage GTree do this, not sure who else?). I think the way Canyon / King Street / Avenue does it for example will also lead to market share gain over time - i.e. there is performing loan guy integrated into the team who can immediately give you pertinent update on when a loan becomes truly distressed and you can ask him/her unlimited questions as they've covered it for years.
End of the day, asset management is a business with revenue growth and huge operating leverage on the upside (and you can cut bonuses to barebones giving it good downside once you reach a critical mass of stability/AUM). If you can get a firm like Blackstone to take a 15% ownership stake at the GP level with growing revenues from continued growth in stable mgmt / perf fees when they actually count (doesn't matter as much if you annualized 9-10% in next three years 2021-2024 if all of that was in a 8% pref drawdown fund or your renegotiated HF side letters that now require a hurdle...); that all in is the best firm to work for.
No one likes working for a company with declining topline and that doesn't preclude HFs from that statement. And that's coming from someone who works a prominent single-flagship type fund that has seen revenues come down and not sure what the future holds. I certainly hope for our fund to magically be up 50% net and 70% gross like was common in the last two recessions but it seems wishful thinking in the extreme. If you were a distressed fund focused on CCC credits in last few years and ignored all the BB and up credits, you've woefully underperformed the "stress/par guys" and that's an unfortunately truth of our industry that i grapple with everyday when thinking I've spotted the next 40c -> par recovery security our firm should buy.
On the conflict side - that is interesting. I've been in a few deals alongside firms that held portions of their "aggregate" position in both HF/CLOs and it doesn't seem to affect the decision making. I think some firms just have a "alternative-credit manager" mindset first vs. the CLO-only mindset is "oh my god, i hope the rest of the team doesn't stuff me with a rights offering or cash out option". I have yet to see the CLO-conflict come up but I'm sure at those firms it's a consideration for the CLO PM who voices his/her concern about the chapter 11 process.
Good observations all around and I agree with many aspects of your argument.
On both of your points on what a CLO analyst might lack, I added the emphasis -- a GOOD par/stressed analyst will have ability to deep dive on focus/situational credits while providing maintenance coverage on carry names. They will have previous distress experience and workout reps to know what to do and what others are looking for. We're not talking about Elliott level savvy, but generally in touch with market trends and toolboxes available to them & others. A bad analyst in CLO land comes in the form of guys that regurgitate management comments and CIMs, inability to form a conviction around key variables that actually matter, and no appreciation for price vs. value because they view the world in terms of coupon/ratings ratio. And that's OK, they have a place somewhere and are sources of price inefficiencies.
There are just as many "bad" analysts at distressed shops. This just takes a different form -- underappreciation of risk, a FOMO mindset that invariably leads them to all the headline credits that their friends talk about, overconfidence in a thesis hastily put together in 2-3 weeks, and misguided sense that they are the smartest person in the room. In other words, they don't know what they don't know -- a cardinal sin in investing as elaborated on by Buffett among many others. These guys have been getting flushed out with every liquid on-the-run distressed trade of the last 5 years and this crisis will accelerate that. Distressed as these guys practice it is NOT counter-cyclical. It is just as PRO-CYCLICAL as buying the S&P ETF (probably more so). This "strategy' boils down to long CCC beta, no matter how much they believe their alpha derives from "complexity premium", "illiquidity premium", and all that mumbo jumbo. In other words, "I did a lot of work and it's really complex" is not an investment thesis.
It's a balancing act. If you have no coverage on BB/B credits and even some equities and IG in your space, you are fishing in a rotten pond. A true HF that serves its purpose in an asset allocator's portfolio should look up and down the spectrum and capital structure to find idiosyncratic dislocation in price vs. value with a catalyst. Whether the firm is in distressed should be just another form factor that you address with restructuring skillset in-house. End game for investing, in any asset class, is to identify value in excess of price to go long and price in excess of value to go short -- this is the only way to generate high quality returns if your core skill set is fundamental analysis. There are other differentiated return sources you can tap from a different process/legal/activist skill set, but I don't know enough and frankly don't have interest. It's trouble if you and your PM are confused as to which one is the true source of your alpha. (it is likely not both...) Obviously, this takes a team of really strong all-around athletes that are comfortable deep-diving and getting to the crux quickly while keeping their radar on for dozens of names in the universe that fit in to various strategies inside of a multi-strat house (par, stress, distresss, long/short RV). I feel like shops like Diameter, Brigade, and it sounds like Anchorage too have done a good job of this. And interesting that Apollo isn't getting a lot of mentions. I get the sense that they are in this camp (different animal) on their credit side -- note their credit AUM is $200Bn. My guess is 90% of that is IG/HY and they glean a lot of insight early on from their performing book on where to make the bets for the 10% of HF/distressed books that they are known for.
you are correct on Apollo - I've worked with their pure L/S credit folks and with their PE team and they are bright and sharp as expected from any top shop but have an amazing platform to leverage off of. In particular, their distressed group heavily borrows from their par-lending operations and private-equity knowledge that combines both deep industry knowledge with DEEP credit-knowledge (they'll know how to fuck you before you can even think of how they fuck you).
I don't get how some people on this forum come on here in similar seats to me (single-manager / flagship "pure HF") and shit on the mega-funds that have hugely grown assets and gone public to the partners great fortunes and tell juniors on this forum that its "not a great place". Apollo (and the larger credit managers) have run circles around us single-managers while we focused on CCC-beta and barely squeeze out a 5% return for LPs or leave our LPs with illiquid post-reorgs that trade like dogshit.
From GP perspective, I definitely agree megafunds are better "businesses" than hedge funds. If you're in it to maximize NPV of your career on a probability-weighted basis, it's not even close. The staying power of APO/OAK/KKR/BX/ARES is unquestionably stronger than even the most vaunted HF with long term track record and star founders. See numerous corpses that look like this: Perry, BlueMountain, York, Mount Kellett, etc, etc. These guys were all considered untouchable at some point in recent history. Redemption is a b1tch.
It becomes a little more nuanced at the individual career level, however. If you are a younger person in your career, one could argue the "right" single manager platform with the "right" senior principals that you actually have access to can be more valuable to your long-term success. "Lost in sea" effect is definitely real -- you can hide at KKR even as a below-average individual at this level. No one holds you accountable for ideas and asks you to push yourself to think harder. You just report up to the VP or Director and push out some models and decks. The job is to not f*ck it up. You will get called out and booted real quick if you're not carrying your weight and stay on your toes at a DK or Silver Point.
As you become more senior and it becomes less about learning/exposure and more about longevity and economics, I do think it would generally be the better trade to be at mega fund for the 90% of people in this business that will never run their own shops or become PM at a sizable single manager. That's when you come into a KKR with hedge fund pedigree and hungry/paranoid mindset and dominate performing/stressed credits while very selectively getting involved in true distressed trades, chill out and clip the high 6 or low 7 figure coupon for your paycheck, build relationships and networks, and see if you are politically savvy enough to move into actually heading up a group or manage a fund at these places. Or you can keep swinging (praying) for the next big pay day at a place like BlueMountain until you blow up -- fine for 1-2 years if your wife works and you haven't built up a lifestyle of enormous fixed costs. If you made it this far and are not a total asshole, these guys tend to land on their feet at decent places anyways. To each, his/her own.
If I was a equity investor in GPs (like a Dyal Partners), however, no way I touch HF GPs unless I'm getting the fee stream at 50%+ discount to direct lending/HY megafund platforms.