Distressed HFs compared to Distressed Credit within PE Firms

I was wondering what people think about working for distressed HFs (Silver Point, Anchorage, etc.) compared to distressed businesses within larger funds (say, GSO or Oaktree distressed). The latter category has stable capital, with all the structural advantages that brings. They are able to invest in the regular corporate distressed situations that distressed HFs invest in, in addition to providing DIPs, opportunistic rescue financing, buying distressed assets, etc. (some distressed HFs do this as well, but to a lesser extent). However, it seems that people tend to prefer Distressed HFs, almost as if they are unequivocally better. I am curious to hear your thoughts on the topic.

Comments (25)

Jan 29, 2018

Would also like to hear someone in the know or who works in the space chime in SB'd

Jan 30, 2018

Generally less sophisticated. Not able to short, not as flexible. IC process is more akin to PE so more of a focus on "loan-to-own" (I hate this term)/"fundamental" investing.

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Jan 30, 2018

A great example of the difference between the two is to look at how GSO (of Blackstone) has been playing the single-issuer CDS market. The larger "PE type" players are able to buy big enough stakes in situations to control the process and outcome and lend money to distressed companies. The more event driven HF players typically do not have the fire power to do that.

I started at an event driven HF in June 2013 focusing on distressed debt and one of my first situations was a Spanish gaming company called Codere. The company was running out of cash and was unable to secure an RCF from its banks. However, the company had some secured debt capacity and the view was that the company would find a way to raise short-term secured financing to plug the funding gap. A lot of funds sold 6 month to 1 year CDS assuming no default would happen in that time frame.

Anyway, along comes GSO, they decide to provide the company with secured financing, BUT, only on the condition that the company delays paying a coupon on its bond (thus forcing a technical default). It turns out that GSO had bought CDS in addition to lending the money so in effect they made money on both their loan to the company (10% coupon) and their CDS position. They have repeated the same trade quite a few times now.

Just one example of how having firepower can allow you to control/influence the outcome of a situation.

Jan 30, 2018

@Ovechkin08 Seems similar to the GSO / Hovnanian situation. Any thoughts?

https://www.barrons.com/articles/congratulations-h...

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Jan 30, 2018

Was about to reply the same. Also linking an (older) article of Matt Levine on the same play for those who are interested (https://www.bloomberg.com/view/articles/2017-11-17...). Well played.

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Jan 30, 2018

That's pretty incredible. That doesn't run afoul of any regulations?

Once that info gets out, who in their right mind sells GSO a CDS ever again? Can they do so without identifying themselves as the buyer?

Feb 1, 2018

If I'm reading that right, that looks like it would be illegal somewhere, but man I'm impressed with that trade idea.

RIP LEHMAN
RIP MONACOMONKEY
RIP THEACCOUNTING MAJOR

Nov 1, 2018

Since this thread got reposted on the front page, I thought I'd chime in: the MD who structured and ran those trades made a lot of money but then eventually the HF's started bringing the case to court (look up Solus and GSO) arguing that such actions would essentially destroy the CDS market... MD got pushed out and raised a bunch of money to start his own shop and think the case got settled

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Jan 30, 2018

Thanks all, for the comments. I have read about those situations and they are extremely interesting. However, that, in my mind, is not exactly consistent with those investors being 'less sophisticated,' as that was an extremely intelligent trade by GSO.

I also think that many of those funds do short. I further would not consider loan-to-own a less sophisticated strategy by any means (and a number of sophisticated HFs participate in it).

Is it a perception issue? Special sits/distressed businesses within megafunds are often seen as 'secondary' to the LBO business. Interestingly, I have seen a number of people switch from top PE to top distressed funds, yet almost no one has switched from top PE to the stellar distressed businesses within their own firms!

Jan 30, 2018

It seems like you understand the benefits of PE special sits based on your first post.

Typically, they operate locked up capital with lower fees than HFs which have open structures and higher fees. You will also see HFs less constrained in the type of security they invest in (i.e. they usually have a large equity allocation in addition to investing in debt. PE shops typically have zero non-post reorg equity allocation). The bigger special sit HFs can do what PE does as well (think Appaloosa etc) and control the process, be more activist etc.

In summary I think there's 3 main differences: fees, closed/open, and cross capital structure/debt focused.

Jan 30, 2018

Thanks, I think the lower fees aspect might explain everything. I have seen megafund distressed funds investing in public equities though, but certainly less frequently than HFs.

Jan 30, 2018

You can't generalize across categories like that and need to look firm by firm. The categories are largely arbitrary

I have nothing else of value to add here except to question the "less sophisticated" comment. And also the fee structure one.

Jan 30, 2018

.

Jan 30, 2018

On fees, its tough to get the transparency. I believe for premier names like Oaktree and other MF PE the headline rate will be ~2/20 (I know some are lower than 2) but they are subject to hurdle rates just like a closed end PE fund, which can significantly reduce fees.

OTOH premier HFs will charge a 2/20 subject to a high watermark, which is much less punitive to mediocre returns. You also earn these fees much sooner than crystalization of PE-like carry in closed end funds.

I believe that LPs are also tougher on fee negotiation for closed end PE funds given they are most likely writing huge checks relative to the funds committed capital and are locking up their money for some time. Someone may have a more informed view there though.

Feb 8, 2018

A very blunt comment here... But one of the reasons people prefer the HF structure is the way comp works. I've seen a lot of people go the HF route because of the below...

People get hung up on the $$$ value of PE-style carry, but they don't realize that:
* you will be on a [5]-year vesting schedule
* these days, clawbacks on carry are serious (you can lose all carry if you go to a competitor, even if fully vested)
* the money comes late, often the bulk of it after 7 to 10 years
* early outperformance can be bombed by later outperformance (and total returns then eaten by the preferred return)
* depending on carry structure, you could get 100% fund carry which means that you get paid off the big pile and not for your deals

The advantage of carry was tax treatment. That is very much under pressure these days.

DYEL

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Jan 30, 2018

Thanks-that was extremely insightful.

Oct 6, 2018

Bump,

Can anyone comment on the liquid Long/Short Credit groups in the credit arms of these PE firms and how they compare to L/S Credit Hedge Funds (Pro's vs Cons)? Do these guys get carry also? I also feel like they tend to be small groups (sub 20 ppl). I know Bx GSO, KKR Credit, Apollo Credit all have liquid/performing high yield investing teams that operate like hedge funds, just don't know much about them other than whats on the website.

Do the large distressed players like Silver Point and Anchorage have L/S liquid credit groups too? like those that invest in HY, Leveraged Loans and CDS?

Can anyone name a few L/S Credit HF's as well so I can do some more research on them. I'm an undergrad, going to be interning in a L/S Credit HF group that is part of a larger private credit group within a top 3 BB, so any extra info would be much appreciated.

Jan 30, 2018

The HY teams are exactly what you would expect. They aim for high single digit returns and tend to be largely net long. They're generally investing in par credit, with some stressed/liquid distressed here and there. Anything requiring a restructuring will be handled by the distressed team within the platform.

The Silver Points of the world are much closer to the distressed teams than the high yield teams. You'll frequently see them involved in corporate restructurings. They also invest in public equities (usually leveraged/deep-value, with the occasional event-driven), which you rarely see the distressed teams within PE platforms do.

L/S Credit is fairly broad and includes liquid distressed, par credit, structured, synthetic, etc. They also tend to include RV and systematic approaches, given the greater emphasis on liquidity/trading. For examples, look into Saba and BlueMountain. Many of the multi-strats have L/S credit strategies as well.

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Oct 6, 2018

Super helpful, definitely going to do some more research on those strategies. What's your opinion on starting a career on the l/s liquid credit investing side of things? And what career progression looks like? Albeit my group is in a BB, they still manage $2+ bn across a few strategies, so I'd assume it wouldn't be too pigeon holeing. (Not that I totally care about that, but nice to know if I'd have an applicable skill set somewhere else).

I feel that the majority of kids prefer the direct lending/private credit side of things, but I'm much more attracted to the faster pace and variablilty of the market and I honestly couldn't do the exact same thing every day.