Sep 04, 2019

Distressed Debt / Workout Groups of Private Credit Firms

Does anyone have any insight into the work / culture / pay / etc of the distressed debt / workout groups that sit within the private credit businesses ran by New York Life / Allianz / PGIM / MetLife?

Are these types of guys more about just getting their principal back with a new credit instrument / cash from sale, or would they ever convert to equity or come up with another creative solution? Do distressed-focused hedge funds recruit from these types of groups?

 
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Distress debt HFs don't recruit from workout groups in private credit/direct lenders, albeit a lot of shops (esp PC investors that focus on sponsor-backed deals like Golub/Madison/Antares) end up owning the asset/company (via credit bidding prepetition debt and/or DIP, article 9 sales, sometimes via full reorgs, etc.). This is because of the mindset during underwriting. The PC fund underwrites at par and analyzes a healthy company (and bet it'll grow/at least sustain cash flows), while the distress HFs tend to buy bonds or loans in the secondary markets at steep discounts and seek to trade up to par or participate/sponsor a reorg plan to gain control (typically with a group of other HFs). That being said, about half of these HFs have disappeared or switched strategies due to the competition/lack of opportunity in the market. The distress HF role is more opportunistic/risky, while the PC workout group is focused on mitigation of steep losses (a big deal to LPs in these funds). Sometimes the PC funds hire outside advisors or FAs (creditor-side work from turnarounds or IB such as Alix, FTI, A&M, Ankura, Berkeley, Mackinac, M-III, Conway, Rothschild, Lazard, Moelis, EVR, PJT, HL, Intrepid, Seaport, GLC, Gordian, Teneo, Carl Marks, etc), while the HFs almost never do (only lawyers like K&E, Debevoise, Winston, Young, Latham, Proskaur, McDermott, DLA, K&S, Sidley, Akin, Shearman, Greenberg, Fried Frank, Ropes & Gray, Reed Smith, Clearly, White & Case, Jones Day, etc.).

 

Yes that's true actually, during a case. I meant prepetition as a hedge fund is just entering a position (one fund almost never hires an IB or FA). Whereas, Golub/Madison/Antares often do (despite having workout groups, sometimes with intent to own businesses. I've talked to some of these PC funds who own 40+ companies in their portfolio [and sometimes are still lenders too] since COVID). The PC funds pay on their own prepetition, while HFs often form groups (like UCC) paid out of debtor's estate. Also, sometimes you'll see Alix/A&M/FTI repping the ad hoc or official creditor groups instead of any IB being involved (and sometimes, you'll see both; but, if you tally it up, the turnaround guys are on more deals).

 

I have worked in such a group and would recommend that you steer clear from such a role if it is available to you. Don't get me wrong, the work is very intensive and challenging. You will work on many restructuring transactions advised by solid RX bankers / law firms / consulting firms. You are correct in your assumption that the aim is to get your principal back. In order to do so you could do many different things depending on the situation (amend and extend, sales process, convert debt holdings to equity, and other creative solutions as you mentioned).

While the work is challenging and interesting, it is a thankless job at private credit firms. Thankless because you are saving the company money rather than actively making money and doing new deals. There is limited recognition within the organization. You will be paid level with the individuals on the origination side despite (imo) far more complicated work requiring more hours. I personally wanted to get more investing experience and was disappointed that I was not able to evaluate/make that many distressed investments. 

Happy to answer any other questions.

 

Good perspective. If you want to be a distressed investor, then be a investor. If you want to just work on work outs and restructurings, then be a restructuring banker. Workout groups are a weird in‐between where you generally have little investment authority or drive the investment thesis, and frankly there's only so much value one can add in such a role, especially since most lenders will have hired external restructuring advisors anyways. I'm guessing these groups are relegated to monitoring deals that have gone south that the other investment professionals at the fund don't want to deal with anymore. 

 

Would say that most of the deal teams at private credit funds are the ones who handle workouts. Have had a couple

of our investments file and will go through the reorg process. Mainly you’ll just take the keys and sell the company so nothing that complicated. The more complicated stuff comes when you can’t really accelerate and have to work something out with the company / sponsor. That shit is hours of calls with the lawyers everyday and can take forever 

 

I started my career at one before moving to IB and subsequently PE. Drop any specific questions you might have below, happy to answer. 

I worked at PGIM and we could get pretty creative - a good number of portfolio companies in the workouts group ended up going through a debt -> equity conversion and other creatively structured solutions. Typically in a workouts scenario the bank lenders get pretty passive and either look to sell out at an acceptable loss to a fund or follow the non-bank lenders lead during the process, so my group was often speaking for the whole lending group during the process. 

Exit ops were mixed - easy to go to originations on the credit side. Got ton of looks for RX IB from top boutiques, ended up lateraling to a coverage group. Two people who left right after I did went to Victory Park Capital (distressed investor) and Golub's distressed investing / workouts group. PGIM's group also has a very well performing distressed debt investing platform (typically into distressed portfolio companies - believe IRR was >50% when I left) which might contribute to exit ops. 

The other advantage to those larger lifecos is that they typically have very structured analyst programs that have been around for a while, so the training they give you is better than your typical middle market buyside role. This applies to both workouts and originations. Downside is compensation and career trajectory (believe analyst program is 3 years at most of these places) as well as lack of carried interest as you get more senior. 

 

If you had the chance to be at a MM/small distressed fund (~$1bn) out of undergrad, would you take it? Or do you think it's better to go into M&A or even RX?

I care more about medium-term compensation and I am not sure distressed will give this to me hence the focus on PE

 

M&A or RX IB will give you more optionality in terms of exit opps, which if you're also interested in PE and solely focused on near-term comp may be a better bet for you. Medium-term comp at MM/small distressed fund could vary significantly depending both on fund performance and the specific economics of the fund/your role. That being said, if you want to be an investor and want to spend more of your time doing intellectually stimulating work (vs. process-oriented IB stuff) the HF would make for a better learning experience. 

 

How does PGIM make PortCo investments from the distressed fund arms length with the PortCo fund while earning those returns? 

 

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