Distressed Debt to PE Exit?

I'm going FT to a distressed fund (King Street/Golden Tree/Diameter/etc) from a target and was curious whether it would be possible to transition to PE down the road or if I'm siloed into credit. Is there a road to PE after distressed or would the transition be hard? More interested in distressed and ssg than PE but just curious what paths may be out there.  

 

Distressed debt and private equity are very two different animals - one is fundamental credit analys, reading through credit documentation, liquidation analysis, running analysis to determine what price you’d buyback the debt, collateral value, etc. relative to private equity where it’s transaction oriented and taking a comprehensive view of an investment, value creation, management team, leverage you can put on the business, etc. Just two very very different animals - both respectable in their own ways

 

This + most people in PE leave before ever making partner - and in many cases to go to HFs, at a HF if you can make money you have a seat at the table, at PE funds even if you can make good deals you may not have a seat at the table due to the structure of the economics/politics. Ultimately if you are confident in your ability to make returns (and looks like it as you are going to a HF out of school) HFs are still the place to be if you can deal with the pressure.

 
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Distressed debt and private equity are very two different animals - one is fundamental credit analys, reading through credit documentation, liquidation analysis, running analysis to determine what price you'd buyback the debt, collateral value, etc. relative to private equity where it's transaction oriented and taking a comprehensive view of an investment, value creation, management team, leverage you can put on the business, etc. Just two very very different animals - both respectable in their own ways

I'm not sure you know anything about distressed debt investing. What you're describing better fits stressed credit. (I think of the differences as being performing vs. non-performing, and ending up with equity vs. earning a YTM.) I've worked in both PE and distressed debt.

Distressed debt investing to me is fundamentally not much different than equity investing. Sure, your host instrument may be debt, but ultimately you are ending up with equity. So you need to have a thesis on why your debt at 50 will suddenly become equity worth 75, 100, 150, etc...post-restructuring. This is about fundamental valuation, which takes into account everything you mentioned about the business, management, value creation ops, and optimal capital structure at exit. The wrinkle in distressed vs. traditional equity or PE is in figuring out where in the capital structure to invest - this is really where the "credit analysis" comes into play.

Distressed debt is also pretty transactional / process oriented....you basically need to structure a deal to buy a company, whether you are coming in with new money / as a purchaser (which will be marketed by a bank just like a PE deal), or rolling over your existing debt investment.

 

Pan European Monkey

You'd lack the 'deal' knowledge that is the core job of an analyst/associate (mostly chasing people continuously on deliverables left and right - ie lawyers, consultants, experts etc). Also generally the move makes 0 sense.

Disagree on the lawyers / consultants / experts point.  I work in special sits / distressed debt and we 100% use all three pretty heavily and we don't do any equity investing. My senior guys sit on boards each as well. To be fair our exposures tend to be 25-100% of the tranche typically so very large slugs.

Still need to diligence business plans etc to evaluate the take the keys, swaps, warrants, etc.

Pretty sure I've seen moves from Bain's debt analyst to PE before. 

If you do want to still try to recruit, I would suggest targeting managers that do debt / equity or distressed for control transactions. Think cerberus, crestview, Apollo, Ares, KPS, Clearlake, Sycamore, Gamut, Searchlight etc.

There's a reason why some of the creditor heavy restructuring banks still place lights out into top PE.

 

Yeah honestly I’ve got a buddy who’s going to a top distressed fund. The guy is SHARP. Guarantee that if he wanted to go to Apollo or Centerview that they’d take him.

OP if you’re smart and you have the basic understanding, you can make any transition with proper networking. Firms with loan to own strategies will give you looks if you come from a respectable distressed firm. 

 

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