Q&A: distressed debt hedge fund analyst & top 3 MBA

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

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Comments (53)

  • Associate 2 in HF - EquityHedge
Apr 21, 2021 - 12:23pm

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). 

Most Helpful
Apr 21, 2021 - 12:38pm

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! 

Apr 23, 2021 - 6:57pm

As a fellow investor in distressed, I completely echo the OP's thoughts

To build off the LT view here - flexibility definitely key. One of the topical situations going on right now is with regards to opportunities following Winter Storm Uri (Texas Storm in February of this year) and I think firms who have found success are nimble enough and having flexible mandates to act on situations when they occur. Truth be told, TBD as to how their investment truly turns out as its still in litigation.     

Jun 17, 2021 - 3:05pm

Economy-wide distressed cycles only happen every 10-15 years, yes. But at one point or another, theres always one industry thats distressed, which is where you allocate the capital. First thing the head of my distressed fund ever told me 5 years ago and its been true.

  • Analyst 1 in IB - Restr
Apr 21, 2021 - 12:48pm

If you were currently in IB would you still try to pivot to a distressed investing role if you were interested in the space or would you look towards other asset classes/opportunities being pragmatic about your career choice? I'm not really interested in traditional private equity roles and understanding the issues with distressed has left me a bit unsure of what to do after IB

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Apr 21, 2021 - 2:03pm

Yea tough question to answer - both are equally important (personal interest vs opportunity set).  I would say net net its more important to go where your interest lies - if you like distressed, even if there are secular challenges, this asset class will still be around in size in 10 years (probably even manage more $$ than now), and if you find the work interesting & you're smart, you're going to be successful.  Plenty of opportunities even now to make a lot of money here.  It's tough to say what alternatives are more appealing - direct lending/CLOs are exploding but i personally find the work boring, PE is doing well but there's so much capital flowing there at some pt (my bet would be soon) the returns won't show up anymore. public equities has its issues.  So yeah, go where your interest lies and you'll probably do well. 

Apr 21, 2021 - 1:52pm

The MBA was a purely personal reason - needed a break and wanted to travel! Completely agree it wasn't necessary for my career progression, but I don't regret it. 

We're all generalist but I've spent time on aerospace, industrials, and power/energy.  We're a typical HF structure, we have some juniors but for the most part work alone and directly with PMs.  I don't spend much time hiring/mentoring juniors.  

  • Analyst 1 in HF - Other
Apr 21, 2021 - 1:39pm

Any advice for people a year into the job at a distressed fund as a junior analyst? Anything you did that was helpful for your career/wish you did differently?

Apr 21, 2021 - 1:58pm

My advice is to get involved in as many active restructurings as possible, both in-court and out.  These have been the best learning experiences for me - and I learn something new every single bankruptcy I work on, even 10+ yrs into my career - whether it's intricacies of the bankruptcy code, interplay btw state vs bk law, negotiating dynamics, game theory, etc.  These have been the most helpful for my career. There's only so much you can learn from spreading cap tables and calculating creation values. 

Things I wish I did differently - this is more specific to me - but I wish I had joined a different firm post-banking.  The brand name was great, the experience was not.  Place more of a focus on what you can learn and how good the people are vs the brand.  It's harder to diligence, for sure.  But I wish I spent less time chasing the shiny brand names earlier in my career.   

Apr 21, 2021 - 1:50pm

I think RX bankers will have a leg up for sure.  If you work in lev fin that could help.  Understanding credit at a minimum is a prerequisite to distressed so to the extent that you can demonstrate that you understand cap structures, banks vs bonds, very basic understanding of credit agreements/indentures, etc. that could help.  Some places are more open to hiring people from diverse backgrounds and my sense is distressed PE in particular might be a better option for you if you want to break into distressed from non RX (since they might have more of a focus on traditional PE type analysis/work) vs a distressed HF

I switched over to publics bc I wanted to round out my experience vs privates and like it a lot better!   

Apr 21, 2021 - 2:24pm

To piggy back off this question, what shops (both specialized buyside and large advisories) would you say are more open to diverse backgrounds? I am also interested in distressed pe. My background is strategy consulting and a couple of private equity search fund internships  

  • Intern in IB - Gen
Apr 21, 2021 - 1:53pm

I will be intern at PJT/HL/EVR RX this summer. I am concerned about the very few distressed cycle that are characterising the rx space, will this mean low deal flow when I am an analyst, low bonuses, little learning experience, more pitching... 

I have always had these doubts but I really enjoy the space and my thinking is that I would rather do something I am passionate about rather than what the sentiment is. Was I dumb to choose rx?

Should I prepare to recruit FT outside of rx, or what advice do you have?

Thanks a lot for doing this!!

Apr 21, 2021 - 2:10pm

If you're thinking about it from the perspective of a RX banker - you have nothing to worry about.  There are TONS of restructurings right now, deal flows are at all time highs.  See article below.  

https://www.wsj.com/amp/articles/coronavirus-downturn-drives-booming-bu…

I expect this to be the case for the next couple yrs as we work through the energy and COVID backlog, so I think you'll be OK for the next few years.  

For thoughts on becoming a distressed investor - see above 

  • Analyst 2 in IB - Gen
Apr 21, 2021 - 2:42pm

You're going to have a tough time at HL doing rx if it isn't something that you're passionate about. 90% of their mandates are creditor sides so while you do learn about the BK process, it's a different experience than working at EVR / PJT / LAZ who also get debtor sides where you're deep in the weeds with a company for months to years. Also, recruiting out of HL rx to a non-distressed role is difficult (if you want something other than an LMM role) so I'd start thinking about doing some networking for ft roles so that you're not scrambling at the end of your summer if you don't end up enjoying it.

  • Intern in IB - Gen
Apr 21, 2021 - 2:44pm

Think you did not read accurately. I said that I am really passionate about rx but now not sure if this is a good place to be. 

Apr 21, 2021 - 3:02pm

1.) I know that this has been covered in past forums on this platform, but what is your favorite distressed related literature and why?

2.) I am hoping to pivot to distressed pe post- d/mba. During my grad school time, I would like to do research assignments (since I enjoy research and to leverage as analysis to chat about during interviews). What what intriguing industry trend(s) would you say is/are the most 'under the radar'?  

Apr 22, 2021 - 9:38am

On 1), I don't have a specific set of distressed literature that I'm a fan of - I learned most of what I learned on the job.  I do think Moyer's book provides a good, thorough overview and also like Creating Value through Corporate Restructurings (CVCR). 

2) Oh nice! I think there's several - the rise of non-bank lenders and its implications for restructurings and the distressed space, another big one over the past couple years has been value leakage away from lenders via investments/RP provisions (J Crew, IHRT), non-consensual priming transactions (serta, boardriders). Also worth exploring is Asian - a lot of firms are turning their focus there but so far there's very little to do - but if you can get ahead of that market evolving and opening up it's a big opportunity  

  • Investment Analyst in HF - Event
Apr 21, 2021 - 7:05pm

Do you feel like you're at a disadvantage as a generalist distressed shop vs. platforms like Goldentree/GSO/Brigade/Apollo/Oaktree where they have sector specialists following every situation and have ready access at all levels including management, advisors, sponsors, bankers, etc? What is the edge of a large cap independent distressed shop with no sector focus like a Mudrick or Knighthead?

Apr 22, 2021 - 9:41am

Yes and no - a lot of those funds have so much capital and very little places to deploy on the public side.  There's only a handful (at best) of situations a year where they can deploy in size (think PG&E) and those situations get crowded very quickly.  The advantage of access is real - but I don't think firms like Knighthead and Mudrick have meaningfully less access.  In the end, it's all about proprietary sourcing in tight markets - and while I do think the bigger players have a slight advantage, mid-size players probably find more mispriced opportunities in smaller cap structures and situations that don't make sense for the big guys.  

  • Analyst 2 in IB-M&A
Apr 21, 2021 - 11:01pm

Thanks a lot for doing this! Why did you switch to m&a from Rx and go back to distressed? Did you feel you learned a lot? Considering a similar move due to the slowdown even though still am very interested in distressed

Apr 21, 2021 - 11:06pm

I'm a junior employee at an RX consulting firm. Initially was more interested in RX banking roles but am really happy in my seat. It's a bit unique and more credit driven than a typical consulting role. I would completely agree with your earlier thoughts; as soon as I got in the seat I realized the old school vulture investing style really doesn't really exist anymore for a number of reasons mostly laid out by you earlier.

What do you think is most interesting in the medium to long term, staying in an advisory role (consulting or banking), trying to move to an operationally heavy distressed PE firm, or a distressed/ special sits HF like your own? 

Apr 22, 2021 - 9:45am

It really depends on what you're looking for - all seats have different dynamics.  I would say lifestyle-wise, publics is probably better - less information to dig through than privates or advisory.  Comp is probably better on the investing side than advisory side.  Other than that it comes down to what you're interested in which is probably the most important driver - and that's for you to figure out! 

Apr 22, 2021 - 9:42am

What appreciate your perspective on what the buy-side recruiting process was like while doing the MBA. Have heard/read that recruiting outside of the big mutual funds is done on a one-off nature (different funds operate on different timelines, some take interns, some not, etc.), was that your experience?

Array
  • Intern in IB-M&A
Apr 22, 2021 - 10:46am

Tips on landing a HF investment analyst job out of undergrad? Or a position in a HF where I can potentially become a analyst? Im currently in sophomore year. 

Apr 22, 2021 - 10:48am

Any additional color for yourself and other peers who were recruiting for public markets buy-side roles? Did anyone strike out and if so, where did they end up? Did you take a broad approach to recruiting or did you have a good idea of which funds you were looking at? There has been plenty of discussion on this site of PE recruiting @ MBA programs but not as much on HFs, so interested in any info you're willing to share

Array
Apr 22, 2021 - 1:47pm

The number of seats are pretty limited, so I think it's best to take a broad approach - particularly if you're recruiting out of an MBA program and have a limited time period to land a job.  I knew what type of work I wanted to do but didn't limit my search to particular funds, etc.  I think maintaining relationships with the key recruiters is important and being patient helps. 

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