S&T to Distressed Debt Investing
The title probably says it all. I was chatting with a buddy about S&T exit opportunities and we had a good debate about the possibility of moving from S&T ( credit sales and trading) to a distressed debt fund. So I thought I should throw the question here and hear what the experienced folks have to say about the possibility of such a move.
//https://www.wallstreetoasis.com/blog/ama-credit-hedge-fund-analyst-at-m…
this thread might be useful
Thanks
No problem. Just curious though, what were your thoughts on the viability of moving from Credit s&t --> HY/Distressed fund?
Distressed investing seems to attract a lot of folks who, for whatever reason, don't feel they are a fit for more traditional investing.
I don't really get why that is.
I've seen a lot of distressed processes, first as a lawyer and then in an IB restructuring group and now in my investing role we look at some distressed reorg opportunities along with other things. To me, while the restructuring/bankruptcy process does add a layer of complexity to the whole thing, it's still a fundamental investment process at the end of the day. It's still mostly about having an opinion on what the assets are worth, which will usually require a fundamental analysis of industry, competition, etc etc etc . . all the same things a traditional PE/HF investor would look at.
And yet, I somewhat frequently see people pursue distressed investing careers when those same people do not have a similar interest in more traditional investing careers. In the extreme, I know several lawyers who would readily admit they wouldn't know the first thing about being a PE investor but absolutely believe they'd be good distressed investors.
I think this comes from a misbelief that the reorg process adds so much unique complexity that having a reorg-specific skill set can be a source of alpha. I'll go on record as disagreeing with that; it's surely a complex process but IMHO still too straightforward to build an investment career off of. Too many people understand it well enough, which leaves the alpha to those who understand the business/assets better than others.
So anyway, to get back to OP's question: if you want to be a fundamental investor of some kind (PE or fundamental HF) then yes, I think distressed is also in your wheelhouse and your credit experience will be a nice supplement. Alternatively, if bottoms-up investing was never for you (as I often see with S&T folks) then I don't think distressed is all that different. Its a different flavor but not a different ballgame.
Thanks for that perspective.
SB’d - this is a very interesting perspective.
Out of curiosity, would you mind sharing about some distressed credit deals you’ve worked on or heard of that have generated strong alpha / returns? Also intrigued by your current role - you mentioned you look at some distressed deals, do you have a very broad investment mandate?
Yeah its a broad investment mandate at a small family office; basically find value wherever we can find it.
One distressed deal we did was to buy a hospital property where the tenant was going through a Chapter 11 and the landlord was an unsecured creditor that was facing at worst a loss of the tenant (catastrophic for property value) or at best a re-structured lease on much weaker terms because the court treats it as an executory contract which gives the debtor all kinds of negotiating power.
So we bought the property for pretty much just its debt, and sat patiently through an arduous Chapter 11 but came out on the other side with a reasonable lease that shored up the equity value in the property.
Point of the example is, I can make it sound complicated with restructuring terminology; but at the end of the day its just about (1) doing a market valuation of the property and then (2) knowing enough about the bankruptcy process to have some faith that it will eventually reach a reasonable conclusion.
Figuring a credible market value that we could rely on was a lot harder than navigating the Chapter 11; the latter sounds more esoteric but ultimately I believe the value is what carries the day no matter how many parties and lawyers want to try and gum up the system with their posturing.
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