Direct Lending --> Distressed/Special Situations Investing

Hey guys,

I've been interested in distressed / special situations investing for over a year now, did an RX banking internship this last summer and didn't get a return offer, decided to post-pone a year to recruit for summer internships again. Given the accelerated nature of summer recruiting, I wasn't able to secure a IB internship at a RX boutique/lots of stuff has already finished. I have a friend at a MM DL shop that helped me get a summer gig at his shop in their sponsors / levfin group. My ultimate long term goal is to work for a distressed / special sits fund. My main questions are:

  1. How transferable is the skill-set I'd get there to working at a shop like, for example, Silver Point or Anchorage? (My buddy says that the role is great for becoming an expert on credit agreements, managing investment after its been underwritten, and you really get a lot of good reps in modeling / financial statements / LBO type work)
  2. How hard would it be to get looks when applying to funds if I'm working in this role and not at a RX boutique / BB Bank and..
  3. What could I possibly do to overcome those potential setbacks?

I'm determined to get into the industry, as I find the space intellectually stimulating and fascinating and think where we are in the cycle, it would be a great spot to end up in over the next couple of years. Thank you all for your help and comments in advance, I'm open to all feedback and/or suggestions.

Comments (15)

Nov 12, 2018

The skillset is very transferable. To be honest, there is a dearth of opportunities in "distressed / special situations" and many funds have pivoted to private credit and performing strategies (e.g., buying lower CLO tranches, etc.). Plus you'll get a ton of reps and learn a sector. Remember that every non-performing credit was once a performing credit.

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Nov 13, 2018

@rionexpa Appreciate your insights, thats how I am trying to look at it. Very helpful, thank you.

Nov 13, 2018

There is a similar thread in the PE forum-I pasted in my reply from that below. I don't want to sound discouraging, but this is not as easy as it seems. That said, there are alternative paths (such as making a lateral move to relevant banking, THEN recruiting for Distressed HFs) that will work.

Rando Randerson:

I have seen this happen in one case. So it's doable, but rare.

Going from Mezz to LevFin/Restructuring banking, and then to Distressed/SS funds could be another option, if you can't do it directly. I know of someone who started in DCM, went to LevFin, and then went to a top distressed fund.

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Nov 16, 2018

The work itself couldn't be more relevant. I would do some reading on Moyer's book. The thing that I think would be the biggest hurdle for you would be the MM name but with enough preparation it's a very intuitive move.

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Nov 19, 2018

The problem is knowledge of the bankruptcy process, options available to each class of creditors is a whole different skillset, which you probably are already aware of if you've summered in Rx. Yes, you technically can recruit for distress and yes, you do have the technical base of covenants etc., but at the end of the day Rx guys are just going to be more competitive (I have friends at BBs in levfin who have tried and reflected the same back to me). If you really wanted to make the jump from direct lending (and this is purely conjecture on my part), you probably need to get your hands into more special situations type stuff in DL, rather than purely financing for LBOs.

With your summer offer secured, I would reach out to any guys from your school at HL or EVR Rx and start networking for FT. Recruit for a place like GLC or Imperial as a back up as well. This is probably the most painless option into distress.

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Nov 20, 2018

Really solid advice here. Millstein used to do a FT process (know a friend who joined there out of a BB who had a return, but didn't like his group), but not sure how things will be with the Guggenheim deal. I would also network aggressively with BB LevFin groups, although hiring there will be ad hoc.

Nov 20, 2018

Some awesome contributions here, all else being equal who would you say would be a more competitive candidate for distressed/special situations investing: a buy-side analyst at a direct lending shop that does senior, mezz, and equity or a analyst at a BB doing LevFin?

Most Helpful
Nov 20, 2018

Can you jump from direct lending? Sure you can. It is still fundamental credit analysis of highly levered issuers, and will teach you solid modeling skills. You're also early enough in your career that you have flexibility to jump around more than you would say 3-5 years in.

Is a direct lending shop the way to maximize your expected value (ie of making it to a large distressed fund)? No, it isn't. Would echo the advice that you should try to go for a RX role for full time. I would not do direct lending thinking it will be a smooth transition. Direct lending shops are more hybrid banking roles than investing. Principals are more concerned about maintaining sponsor relationships and deploying capital than actual credit analysis. They do perform a lot of diligence, but it is with access to significantly more information and isn't really comparable to distressed given the lack of game theory, liquidity / trading, covenant work, complex corporate structures, etc. It will be a big learning curve making this switch, so the sooner you can do it, the better candidate you become.

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Nov 21, 2018

At the MM DL I work at there is a workout group. would be worthwhile to try and switch into that group at some point.

Nov 21, 2018

Am currently working in LevFin and I would say that BB LevFin at a LBO heavy shop (CS / Barclays / GS / DB / BAML) would set you up well for a direct lending shop whereas a RX gig would set you up better for distressed / special sits shops

Agree with BeastMode's statement that a direct lender is really more of a hybrid banking role than pureplay investing. The DD is usually handed to you on a silver platter by the PE fund (who's already gone through all the DD and are confident in it) and there lacks the game theory aspect that is the crux of any distressed situation. A lot more flow in direct lending as well if you're in a top shop (Ares, Oaktree, Hayfin etc) so it almost feels like banking at times juggling multiple projects with set deadlines. On the other hand, distressed is a lot fewer opportunities but when one pops up you really dig down into it, into every single detail like RX banking

Also note valuation plays a big role in any distressed situation whereas in direct lending, valuation is usually just whatever EV the sponsor feeds you as their purchase price for the target company

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Nov 22, 2018

Thanks everyone for your comments and helpful insights. I think this has really been insightful and good to know headed into my summer. RX is definitely more competitive to get into, and I think its a fascinating space, so, I'll see what I can do over the summer in regards to FT opportunities.

What would my prospects be if I look into getting a FT RX at a top shop coming from a background of RX one summer and a MM DL the summer prior to that?

Dec 10, 2018

Biggest piece going from DL to a distressed fund is the markets aspect.

You go from making decisions with 100% of information in a private transaction, to having to make an investment decision with 20% of the info.

In addition, investment pitches are a big component of even getting the attention of someone at a distressed fund trading public securities.

Dec 11, 2018

For those that are contemplating the transition from shops that do DL/mezz/equity co-invests to more of a special situations/distressed focus what would you all recommend besides reading books like Moyer's?

  • Associate 2 in CorpDev
Oct 20, 2019

Where did you end up OP?

  • Prospect in IB - Gen
Oct 23, 2019
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