Distressed Debt to Private Equity

Hey guys,

I was posed a really interesting question recently, and I had no clue how to answer it so I wanted to throw it out to you. A friend of mine works for a top distressed debt shop (Monarch, Sankaty, Oaktree) that she got into directly out of college a few years back. However, she wants to move to more control-type investing like that of an LBO shop. However, she didn't do investment banking. Is there enough of an overlap between distressed debt and LBO investing to make the switch seamlessly without prior banking experience, or would there be a problem? Additionally, would it be possible to land a top LBO firm (KKR, BX, TPG)? I'd appreciate any advice any of you might have on this.

 

the thing is the skill set is completely different... distressed people are good at special situation valuations and taking advantage of mispricings... the diligence doesn't revolve around industry, management, value creation etc. its more of finding where the fulcrum security is, buying a control position and lead negotiations... thing is most of these shops aren't even turnaround shops, they get out before they really restructure and turn the company around... if she had the turnaround expertise it would be applicable, unfortunately from what I know, they do a true bottom up analysis in distressed, not really caring about the dynamics of industry, company, market share, just taking advantage of improperly priced secondary debt...

the primary diligence is unique and she'd have to really demonstrate that her skills in distressed can be utilized as a turnaround type experience... then she'd be ok, but she'd still have to have her LBO modelling down cold and primary diligence from industry down to company down cold in order to stand a chance...

my experiences with people from the distressed world... theyre more hedge fund focusing on IRR and quick turnarounds where as in PE cash on cash multiples play a bigger role ie no time pressure to flip...

 
Best Response
MezzKet:
the thing is the skill set is completely different... distressed people are good at special situation valuations and taking advantage of mispricings... the diligence doesn't revolve around industry, management, value creation etc. its more of finding where the fulcrum security is, buying a control position and lead negotiations... thing is most of these shops aren't even turnaround shops, they get out before they really restructure and turn the company around... if she had the turnaround expertise it would be applicable, unfortunately from what I know, they do a true bottom up analysis in distressed, not really caring about the dynamics of industry, company, market share, just taking advantage of improperly priced secondary debt...

the primary diligence is unique and she'd have to really demonstrate that her skills in distressed can be utilized as a turnaround type experience... then she'd be ok, but she'd still have to have her LBO modelling down cold and primary diligence from industry down to company down cold in order to stand a chance...

my experiences with people from the distressed world... theyre more hedge fund focusing on IRR and quick turnarounds where as in PE cash on cash multiples play a bigger role ie no time pressure to flip...

Absolutely agree.

But the real question is: why would she want to go from a distressed position at a buyout shop to an LBO shop? There is a helluva lot of money to be made there and the universe is a lot more interesting, if you ask me

 
MezzKet:
the thing is the skill set is completely different... distressed people are good at special situation valuations and taking advantage of mispricings... the diligence doesn't revolve around industry, management, value creation etc. its more of finding where the fulcrum security is, buying a control position and lead negotiations... thing is most of these shops aren't even turnaround shops, they get out before they really restructure and turn the company around... if she had the turnaround expertise it would be applicable, unfortunately from what I know, they do a true bottom up analysis in distressed, not really caring about the dynamics of industry, company, market share, just taking advantage of improperly priced secondary debt...

the primary diligence is unique and she'd have to really demonstrate that her skills in distressed can be utilized as a turnaround type experience... then she'd be ok, but she'd still have to have her LBO modelling down cold and primary diligence from industry down to company down cold in order to stand a chance...

my experiences with people from the distressed world... theyre more hedge fund focusing on IRR and quick turnarounds where as in PE cash on cash multiples play a bigger role ie no time pressure to flip...

Thanks for this great answer, MezzKet. Wish I could have put it that way when I first got the question. Without the turnaround experience but with very strong fundamental valuation/due diligence skills, does B-School provide at least the basic skills needed to make a lateral switch to an LBO shop afterwards?

Haha, baloogafish, I'm just the messenger. (Should probably just tell her to get a WSO account) I think the reason though has to do with stories like these regarding the continued blending of LBO and distressed debt strategies at major PE shops like KKR and Apollo:

http://www.bloomberg.com/apps/news?pid=20601014&sid=afR3iUo3ptKw http://www.bloomberg.com/apps/news?pid=20601109&sid=aZaXc0DeZAFU

Wanted to get a better sense of the overlap between the two given that she wants more control-based investing experience.

 

believe it or not, those debt buyback deals aren't necessarily done by the buyout teams / funds... they might be done by a distressed debt team. The buyout teams really lack the necessary understadning of distressed tactics to risk that much money on buybacks... I think a b-school degree will open up a lot of doors, and personally I think there is much more thrill in distressed than LBOs... they're glorified by the press but situations aren't unique, the process is always the same, models are the same, industry might change (not if you're specialized in a industry group team, most megafunds are like this), and at the junior levels its just build a model, a memo, act as intermediary with the lawyers, close, rinse & repeat... AND you'll be lucky to do more than 2+ deals a year!!!!

 

I get worried quite often that people like me looking to break into distressed right now are too late to the party. Your friend might be onto something, trying to get out of distressed before the KKRs and Blackstones resume their position as masters of the universe and jr. distressed folks are shown the door. I'd be happy to be corrected, though, especially since, like I said, I'm really interested in distressed. Can anyone make a case for relatively good job security at distressed groups over the next 3 or so years?

 
MMmonkey:
Stalking_Horse:
Can anyone make a case for relatively good job security at distressed groups over the next 3 or so years?

see michael tennenbaum's comments last week. just search his name on google news

http://blogs.wsj.com/privateequity/2010/03/11/that-can-youre-kicking-do…

Interesting read. Wholly agree that many companies (esp. highly levered companies w/ financial sponsors) have way too much to be paid back. But what's to stop lenders from rolling back the maturing debt and allowing the companies to refi, just as they have in times past? One of the main reasons we saw so many bankruptcies in the last two years was because the frozen credit markets didn't allow that to occur.

 

Prolly gonna be tough to see good distressed situations so long as low rates are providing for borderline free money. You don't need much of a yield to accomplish monstrous spreads with current fed rates and LIBOR, too much cheap money is out there chasing yields, prices are way too high. Every deal I look at lately is upsized and comes out at the low end of price talk, and the books are full weeks before the deal is syndicated, so to balooga's point above, for the interim it sure does seem like deals are going to just get pushed out, more amend & extend's and recaps.

In this market investors can earn L+250 and still generate 18% or so ROE if levered 7 times (fairly standard), and coupons on a lot of decent deals are coming out north of L+400, so we can all do the math on how fast prices rise up.

 

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