Moving to Buy-Side in a Recessionary Environment
IB analyst thinking about next steps in my career and move to buy-side. Given we're on the verge of entering a recession, are there certain PE/HF investment strategies that people expect to fare better than others? Would love to get peoples thoughts.
- Is it a good time to enter PE since so many funds have raised capital in the past couple of years? Conversely, financing markets have dried up in recent weeks and leverage levels are near all-time highs.
- Is distressed credit the place to be right now?
- What about equity long/short?
- Direct lending/private credit?
Boy, there's a lot to discuss here. Let me take a crack at this line-by-line and see if we can start a conversation.
...maybe? If that was certain, then wouldn't it be easy to short the shit out of the market and make a giant pile of money? Someone who's a hedge fund guy or AM who follows public markets closer than I do should weigh in here. thebrofessor has to have covered this already.
I would imagine that if someone has a really robust equity thesis that's built on the back of a downturn, they'd be unlikely to share it here for free. In my illiquid lower-middle-market PE world, you can look through the our websites and see that we're all looking for the same damn thing: some asset-light, diversified, scalable, recession-proof, high-cash-flow, under-managed business with deep contracted relationships looking for an off-market transaction. In other words, we all want something that minimizes risk because as a cohort we're not very good at mitigating or pricing it.
Having said that, if someone has a specific strategy where they believe a certain type of business with a particular set of characteristics makes it look like it'll get hammered by a downturn (and that perceived hammering gets priced in), but they have a playbook to mitigate that risk or understand why this time is different or why the business will escape a big hit, then they could acquire that business at a pretty steep discount to its real value. That's going to be a small universe of sellers, though, since you'll have to wait until the recession is real for the discount to kick in, and your seller would have to be pretty motivated to still want to sell at that time.
APAE , NuclearPenguins , Whiskey5 TippyTop11 any thoughts?
I'll just comment on the first, since my opinions on credit or public equities are not very well-informed. Is it a good time to enter PE? I think it depends on what you're hoping to get out of a PE experience.
If you're hoping to do deals, just sheer volume of deals, then go to it. There's a goddamn mountain of dry powder, and the desperation of having to put that capital to work makes deal volume a near-certainty to keep churning. All those dollars can't stay on the sidelines, no matter how tough it gets to find good opportunities. Deals will happen.
But if you're hoping to learn to be a disciplined investor, then I don't know if I'd say this is a good time to look at PE. I've written before about the "six tools of PE" (sourcing, evaluating, transaction execution, portco management, exit timing, and fundraising), and the one that has been most rewarded in the last 5 years is the ability to fundraise. LPs, for all their caution, don't always know what they're looking at - remember, a lot of the people making allocation decisions to PE firms have never worked in an investing role, so they don't necessarily have the experience or acumen to judge if the guy with a nice resume sitting across from them at the table has any ability to be a good investment evaluator*, but they sure as hell respond to a slick sales pitch - so I think there are more than a few young firms out there with oversubscribed funds who, as we will find out over the next decade, aren't very good at making good investments.
(*This is maybe a separate thread, but Cambridge Associates has some great material on what LPs look for when they interview PE firms. Spoiler alert: it's past success, because LPs as a whole are just not very good at figuring out what underlying capabilities or environments have made a group successful, so it's much safer to pick a group that had a good fund and blindly subscribe to fund 2.)
At a junior level, I wouldn't be too worried about all this. It might be useful as you contemplate a career in PE, but I don't think you'll have a problem getting deal reps. You might keep it in the back of your mind if a partner advances a deal that is dogshit with a bow on it, because they might be under a huge amount of pressure to just "get a deal done."
helluva lot easier to develop a kickass track record if you're coming in at low prices. with your list, here's what I think (keep in mind I'm just a dumbass in PWM who is a LP for the masters of the universe in PE)
PE - yes, I don't know of a bad time to be in PE, but I'd personally favor shops that have been through many cycles versus brand new ones
distressed - hell fucking yes. corporate borrowers got drunk on low rates and the hangover is coming, plenty of opps here soon
L/S - nope, space is shrinking, unless you have a compsci degree and can go to DEShaw, citadel, rentech, etc., I wouldn't do it
direct lending/private credit - this is a tough one, because in general the space makes sense, but it's so overcrowded right now. howard marks did a podcast on this on bloomberg (I think with pimm fox) and tons of guys out there doing direct lending right now are first timers and are levering up. if we see a credit event (and I think we will), you don't want to be here. sure it's fine to be at a shop that has co-invest, secondaries, private credit, and thematic funds, but direct lending only sounds dangerous to me.
on the recession thing, I look like a gigantic dumbass because I penned a piece about being bullish promptly before the 2nd worst December on record. I think I'm right long term, but short term I've got a dozen eggs on my face, so take what I have to say with a grain of salt. I don't think we're on the cusp of a recession, just a moderation in the growth rate. maybe I'm right, maybe I'm wrong, but I think with your career, you can't time your entry/exit. for example, if Lehman called you in 2006 to offer a job, you'd take that shit all day long. if we are on the verge of a recession and 2019 vintages turn out to be shit, would you still turn down an offer from Oaktree/KKR/BX? hell fucking no. I think you're wise to ask which space makes the most sense, but my advice is go with a good shop with good processes and that has some history. your career will see ups and downs, but you need to take a good opp when you have it.
case in point - 2018 was one of the worst investing environments I've faced, but it was one of our best years from a business standpoint. go figure. bad markets don't necessarily mean a bad career.