Distressed Investing: This Time It's Different

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One of the most popular stories from the GFC was from those that made incredible money on the recovery. To hear them tell it, distressed investing was simply finding formerly strong companies that had taken a hit during the crisis, picking up their equity at bargain prices, and riding the wave up as their markets came back to life and the investments prospered. Anyone calm enough to stay liquid and buy at the right time could make a mint.

Talk about rose-colored glasses. I remember very logical, educated people arguing that the capital markets had been permanently damaged, and the global economy did not have the levers required to restart economic activity at pre-GFC levels. Being an investor when the prevailing sentiment is that the world is ending takes brass balls and more than a little faith. Remember, there are two sides to a trade - there were sellers at low prices that were more than happy to escape with cash.

I've been thinking about that time lately, as I've come across dozens of investors who are licking their chops. The groupthink seems to be that this is going to be easy - the economy is in the toilet after three calamitous weeks, and businesses are suffering. Anyone with liquidity can scoop up good businesses going through a rough patch for a fire sale price, and ride it out until the economy roars back to life.

If this seems too good to be true - it is. A couple counterarguments:

  1. The economy can stay irrational longer than you can stay liquid. Or whatever the quote is from When Genius Failed. Assuming the economy will bounce back unchanged is an optimistic view, but not an informed one. There is not consensus for what sectors are going to bounce back, and when, and what the long-term effects of this pandemic will be. Just like on a short, someone can be right on an investment thesis but have the timing wrong and come away empty.

  2. There are still two sides to every trade. If it's obvious that a company is going to return to its former greatness, then why would a seller sell? Unless they're in a liquidity crunch and have no choice, but there's way more liquidity in the marketplace for operating businesses this time around than there was during the GFC. The system is being set up to give relief to the very small- and mid-sized business owners that would otherwise find themselves in a bind. Nobody's going to give away something valuable for no reason.

  3. We have a much more crowded investor landscape. There are just more hungry people going after the same deals than there were 12 years ago, which will stretch pricing on deals to the ballsiest bidder. I don't think we're going to see the prices drop out for a while, either - at least for the rest of the year, I could even see them going up. If a company pre-CV was making $10M of EBITDA and it's down to $4M this year and the buyer thinks it's a temporary dip, then who cares if a $60M purchase price is 15x TTM EBITDA? People are going to get over "multiple shock" pretty quickly if they think the return profiles make sense.

Net/net, I don't think distressed investing is easy in a volatile environment (or ever). It takes a lot of specific knowledge and analysis, combined with vision, to figure out if a business is temporarily inconvenienced or if it's a falling knife, and what can be done to influence its future performance.

Would love to hear from others looking at distressed assets over the next 12 months, or from those who have done it successfully over the last decade. Or if anyone just thinks I'm flat wrong.

Comments (33)

 
Apr 9, 2020 - 10:20am

love this Layne, as someone who allocates to private credit, I've been very worried about this space, and spoke about it a few years ago when this product really started coming down the pike to the PWM space. the story was the same - we're an experienced asset manager (goldman, carlyle, kkr, etc.) we're doing senior secured nonbank lending, applying a turn or two of leverage and going to get equity like returns with bond market like risk. many of these lenders had been through a crisis, but the majority of product coming my way (not necessarily the managers listed before) was either with shops that hadn't ever done a credit fund in a crisis or had a PM who had never run money through a crisis. bad news. on top of that, the PWM world's appetite for yield was insatiable, with every new launch selling out almost immediately.

leaving aside the obvious - there will be a lot of poor fund performance during this time, what do you see as the contagion risks? part of me worries that there could be ripple effects if we get covenant breaches, maybe a credit fund fails, leverage magnifies it, you get the idea...

assuming the loans are not cov-lite, will this recession be deep enough to break covenants?

where do you see most of the damage occurring? energy? low/no earnings IT? consumer?

assuming you have capital on the side and know a good manager when you see one (oaktree, ares, etc.), is now the time to fundraise or is now the time to put money to work? part of me thinks this gets worse before it gets better but I know credit and equity move in different cycles.

Thanks Layne!

 
Apr 11, 2020 - 9:59am

I have to show my limitations on this one, Bro. Distressed credit and distressed equity are very different games, and the distressed equity I know in the lower middle market ($150M of EV and below) is a very different market than distressed equity strategies that megafunds are packaging and selling to the PWM world.

But at a high level, I don't think this is a big enough market to cause lots of contagion effects. I do think the main risk is poor fund performance / fund collapse.

The timing is a great question. I think the serious money is gearing up to deploy right now - I can't imagine this is a great environment for fundraising. Unless you live in a giant organization and they have the means to organize, fundraise, and close a fund for a focused strategy in 90 days - which isn't impossible. It's the little guys like me that are only getting calls returned if they're long-term relationships.

Array
 
Apr 11, 2020 - 10:38am

thebrofessor:

know a good manager when you see one

Wanted to add a separate comment on this concept. How do you evaluate managers? How do you know what you're looking at?

Reason I ask is that when my fund went through its fundraising process, I was straight-up floored by how little the asset managers knew about my job and whether our firm was good at what we were doing or not.

I remember sitting across the table from two guys when we were fundraising - one was 26, the other was 30, and both of them had joined their state pension fund out of college and spent their careers there. I know that their daily responsibilities were primarily reporting, putting packages together on their different allocations. Never worked in a business, never worked in finance, never had an investment thesis challenged. But here they were, trying to decide how good my firm would be at doing those exact things.

It's hard to believe they were doing anything other than guessing, based on the thickness of our IC memos and how smooth our explanations sounded.

Maybe for a time PE was a lucrative enough asset class that someone could pick a handful of fund managers and turn out okay. I don't think that's the case anymore. I think somewhere around the middle of this decade, asset managers are going to look at fund returns and go "shit, this is harder than it used to be" and either get better at scouting, or pull back their exposure.

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Apr 11, 2020 - 11:48am

Pretty mind blowing. I was surprised the same way when speaking to real lenders for the first time. I felt like they didn't really ask the right questions and were ready to write a cheque. I remember my partner at the time who knows me well and has a formal background in PE had to interrupt me when he saw me look confused and about to say, "That's..it?" in response to their DD questions lol.

 
Apr 13, 2020 - 9:10am

the short answer is it's a crapshoot. most FAs and institutional consultants are bad at this, I'm not saying I'm good, I've just been blessed with a good team to learn from and I think being a natural skeptic and contrarian helps here.

first thing I look at is track record. not of the firm, of the managers. how many funds have they overseen? what was the economic environment like at the time? are their composite returns buoyed by one fund that crushed it and others that were just so-so? how's their IRR compare with TVPI? am I looking at a 30% IRR but only a TVPI of 1.3x? fuck that if that's the case.

after I've satisfied myself that the firm/managers have done this before and done so successfully, I'll then ask about skin in the game. how much will the managers comp depend on the success of their funds? how much of their net worth is invested in their funds? do they have a founders mentality or do they have no skin in the game? I know I've shat on Elon and Bezos here before, but the fact they live and die by their company's stock price is the best example of skin in the game. I want people managing my clients' money to have the right mentality

finally, I look to risk. I'm a firm believer that you cannot predict returns. sure, you can look at averages, but to try to predict what a fund is going to do is a fool's errand. I know it's unlikely I get 20% CAGR if interest rates are low and everyone's chomping at the bit for PE access. on the flipside, if multiples are low, returns are higher, but I don't know the specific number. since I can't forecast returns, I look to risks. risks could be bad apples spoiling the fund. how many deals does this firm turn down? what % of the portfolio is an average position? what's your sector exposure? if it's a credit fund, what % of the loans you made experienced a technical default and what's your loss ratio on all prior funds? I say all of this because there's some research on public equity (and I believe it translates to private equity & credit) that basically asserts you can beat the market if you do nothing more than avoid the losers. I don't care if I don't get the highest return, my clients are already rich. I don't want them to get fucked. if they get fucked, I get fired. if they make a good CAGR that's not a world beater, I'm fine with that.

as you might imagine Layne, because of this, I say no a lot more times than I say yes. but when we say yes, we back up the truck. if I had to guess, we refuse 95% of the managers that come our way, and while it's caused us to miss some of the big performers, it's also avoided a lot of headaches.

 
Apr 9, 2020 - 4:00pm

My main source of deal flow is VCs and growth equity investors that want to turn an investment around/want to dump. We're also turnaround operators > investors so YMMV/take whatever I say with a grain of salt.

Over the last 3 years venture capital has flooded the DTC/DNVB space, driving up valuations for those investing in early-stage DTC. In 2018 alone, venture funding reached $1.2B - up from only $430MM in 2013.

The problem, as many venture firms are discovering, is that being valuation agnostic and hoping for multi-billion dollar exits isn't feasible in the space. Paired with smaller exits and difficulty scaling, many DTC brands are running into financial trouble as they struggle to raise the funding they require to fuel unprofitable growth.

Brands like Casper, Outdoor Voices, Brandless, Glossier are either running into serious financial trouble or liquidity events that match up with valuations assigned to them by the venture capital firms that led their rounds.

As these firms continue to collapse, we've found some really compelling deals on brands doing $10M - $30M in rev. COVID19 related issues have just accelerated the timeline, so I've been getting some delicious calls from boutique iBanks & VCs.

It helps that lower-middle market buyout firms specialized in distressed eCommerce & DTC are almost non-existent, ensuring we're able to scoop up assets at attractive prices and unlike industrials or energy, there simply aren't operators & investors available in abundant supply to capitalize on well-priced brands.

My big problem right now is finding GOOD operators that I would be able to drop into these deals as the VCs want someone to come in and assist with executing a turnaround as interim management/consultants (offering discounted equity + options + cash) over dumping the equity position. This is to save face and appear founder friendly. Not sure why they are so obsessed with being founder friendly, probably because they aren't burning their own capital but hey.

 
Apr 11, 2020 - 10:11am

Thanks, JS. Appreciate your thoughts, since from your contributions, you seem like a level-headed veteran who knows the challenges in the space. I think we'd all appreciate some war stories if you have the time to share.

Quick question that might have a long answer: in a turnaround thesis, would you rather back a great management team, betting that they can out-compete their landscape in a tough environment, or back a great growth thesis, betting that demand will take off and the company will go with it, and all management has to do is keep the car on the road?

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Most Helpful
Apr 12, 2020 - 9:10am

Layne, I've stuttered a few times to answer this as my POV is so niche and non-traditional.

Management:
I've never met a turnaround opportunity with a great management team, almost by definition. So I'm usually working with who I inherit minus one or several execs who were shown the door. The logistics of bringing in an all-star team sounds logistically complex; who are they, where are they, how do I find and recruit them, will they work well together, with me and the existing team? Instead I always find myself working with the bad-news-bears equivalent of a management team who has been mistreated by poor leadership. We develop and support them and get them to the playoffs.

I look at turnarounds in 3 distinct phases, each requiring unique skillset but more importantly, unique temperament.
- First 100 days of radical surgery, often with a machete
- Next 1 year of transitional stability where stakeholders are led from the carnage back into sunlight and hope. Big focus on people but also discipline, accountability, process, systems, core strength, etc.
- Next 5-10 years of growth from a traditional CEO who will show up every single day and push for incremental growth.

Growth Thesis screams risk to me. A turnaround, by my definition, is cashflow negative, negative profitability and broken balance sheet. A situation that needs stability and cannot and should not waste a breath of energy thinking about growth. If I do my job, in 2-6 months we can have positive cashflows, positive PL and a restructured BS. Then we are the sharpest sword in our industry; lean, core strength, healthy habits, monastic focus, clean BS, on our toes, scrappy mindset and looking to kick someone's ass. Everyone else is just like they were 2-6 months ago; softening with age and not paying attention to us.

This provides a foundation of growth but the BS still lacks the strength to fund growth (risk) and is usually spent catching up on deferred investments in Capex, R&D, etc. This is where the 1-year CEO makes his/her improvements; building back, isolating opportunities and developing a vision for the future. The 5-10 year CEO will provide the growth but if we're the owners, I'd rather control against downside risk and let my variability happen on the upside. Usually someone else is the better qualified owner after one year.

Here's an analogy I use to think about value add;
- College athlete who I can train and develop for the Pros. This is person with proven; genetics, talent, work ethic, smarts, etc. Some execs are exceptional at taking Good to Great and this is where many CEOs make a name for themselves. This is also what maybe 80% of all business writing covers in books, textbooks, magazine, etc. All the glamour bullshit they teach you in school. ROI in range of traditional public equities.
- High school kid with some raw talent. We need to develop their; talent, work ethic, field smarts, etc. This is a bigger lift but offers more upside. Maybe it's going from Unproven to Good+. This is more startup culture and too messy for most 'proven' CEOs. A definite niche skill that consumes the other 20% of business media. ROI in range of traditional PE.
- College athlete who was in a horrible car wreck and is bleeding out on the side of the road. His dreams are shattered and living is the only thing which matters any more. With quick action we can restore a pulse, staunch the bleeding, stabilize and get him to the ER then a year of physical therapy. Getting him back on the field next season is the goal, not the pros, not the superbowl. The Good to Great crowd has no interest in restoring Good, they see Good as an unworthy aspiration, something that would never be covered in an MBA class. But think about the value-add and ROI.

Now, back to your OP, half the economy is in that car wreck phase (more accurately, headed there but with limited foresight). The traditional CEOs have no f-ing idea what to do next. ZERO. 80-95% of all business education over the last 30 years has un-prepared them this moment. The PE CEOs have the talent and some of the experience to figure it out, just not the reps. A few oddballs are uniquely prepared for this moment but as you point out there is a big dislocation between demand and supply.

Hope that helps. It was a long answer.

We pay generous finder's fees for industrial car-wreck situations with revenues over $50M.

 
Apr 9, 2020 - 10:37pm

I wonder about distressed-for-control investments at the moment. Guys like Doug Ostrover (the 'O' at GSO/Blackstone) are raising money for what essentially amount to a distressed-for-control strategies. To the point made by m_1 earlier, I don't know how they intend to handle the workouts. Ostrover's new(ish) fund is called Owl Rock Capital (he left GSO in 2015), and I'm sure they're quite good at what they do, but there is no way they have the manpower to handle more than maybe a dozen workouts at one time. I don't know how many guys they have in their workout group, but there is no way even the best restructuring professionals can handle more than 2 turnarounds/workouts at once.

And frankly, the operating partners who have led businesses successfully in boom times aren't necessarily the best interim managers during a crisis. That's not how they made their bones, and there are only so many guys with any real managerial experience who have successfully navigated what I'm sure will be a very deep recession. I have spoken with all the major restructuring shops (not just the banks, but the operators as well), and they're swamped with incoming calls at the moment. There are only so many people who have that skill set and once they're on projects or deals, you're not going to be able to peel them away for months at a time.

Most PE funds are not good operators of distressed companies even in boom times. It's fundamentally easier to buy as a reasonable price, apply some leverage and sell later into a rising market than to buy a messy asset and try to fix it. And while a lot of PE investors think they have the latter skill set, they don't. That skill set is much rarer than people think and is obviously not acquired through any length of time spent as an investment banker. It's more of a consulting skill set, but even then, it's quite rare. There just aren't that many high quality operators you can drop into a rough situation who will find a way to survive.

As a result, I have to wonder how PE investors intend to put their money to work this time around. Salivating over seemingly low prices for assets that will need restructuring seems short-sighted to me. If you can't actually handle the workout yourself, and there aren't nearly enough people with that skill set to handle all of the distressed situations that will present themselves over the next year, you won't be able to make the operational changes you need to effect turnarounds. I know for a fact that several of the large distressed debt houses are already locking up mid-market banks and boutique consultancies with exclusivity clauses for this exact reason. That said, I suspect that a lot of investors haven't thought that far ahead yet, and are going to be surprised when they learn just how hard it is to find decent operators during the crisis.

 
Apr 10, 2020 - 8:20am

Brotherbear, I think you are spot on.

I fully expect an echo opportunity in a year or so as all the "I did a turnaround once" or "always wanted to do one" investors and operators jump in and deplete themselves against the storm. For 18 now years I've done nothing but turnarounds, over and over, rep after rep without a single healthy-company day in there - and I still get my ass kicked and learn hard lessons with every new business. It's tough low-odds work but in a recession every unemployed CFO in America rebrands him/herself as a turnaround pro and everyone less experienced than them believes it. The new cash from these investors will extend a troubled company's life and provide an important societal benefit, if not an investor benefit. Some companies will survive just on these bad-bets rolling from one jv operator to the next.

 
Apr 10, 2020 - 9:38pm

There are too few people like you in the markets these days. In bull markets, it's a tough job and not as lucrative as a lot of (comparatively easy) investing roles. In the bad times, though, that's when you can make bank. To be clear, it's still a very lucrative career path. It's just a lot more work and risk than other jobs that require the same skill sets. In any case, I hope this next year or two treats you well and you cash in on your expertise.

 
Apr 11, 2020 - 9:54am

Spot on brotherbear . As asset quality deteriorates (lower revenues from supply chain issues, insufficient demand, more fierce competition, clogged sales & distribution, longer sales cycles, combined with operational or staff issues, perhaps even funding, depending on access to capital) and every one is running for the exit, seasoned distressed/ turn around operators will be quickly booked. Alternatives like m&a with more stable corporates also dries quickly, as they get choosy/constrained and timing is against sellers (I recall during the GFC working through sketchy presentations /IMs from failing banks/assets from those over weekends/early mornings to enter into shotgun decisions to acquire them. Very deep into the real value of them at really deep discounts...some even embarrassing, as we all know the names).
The last bull cycle with all its monetary exuberance was a benevolent one with good weather captains, CEOs and Founders alike, as well as less disciplined investors, who just splurged money without asking much (or making a thorough assessment). I recall a wise saying of people swimming naked.
As thebrofessor was mentioning, I recall fancy tables "stress testing" investments against large market downs (30s, 70s, 87, dotcom, GFC etc) post GFC. No discussion on those a few years after the recovery of the GFC was in place. Now you have the next one here.
In terms of investments, it is important to understand from the revenue drivers, which elements will be affected, how much and for how long. Run-rate and access to capital will help the picture. We have portcos that are going through very challenging times, as customers have accelerated demand and team can't cope with speed of requests. Nice situation, hope it lasts. Others simply getting quite battered, trying to raise funds (existing shareholders, govt, whatever). True intrinsic value will be more visible, if their USPs/setup/customer base is more stable/defensible/reliable. In one, we are about to get an operator (fingers crossed!), experienced and driven enough to articulate a clear plan. All investors onboard. Steep price to pay (dilution, salary, bonus, etc), but the asset is worth the effort and pain. For others covid probably just accelerated what we suspected a few months post investment.

It reminds me of a fast & furious scene, where the blond guy pushes the nox button, accelerates and passes over wim diesel, only for him to say "too early, you rookie". Knowing your timing is very important, even if you have the wherewithal and balls to go distressed. Or you just love to gamble. Or you just love the industry, service, team, value proposition or good to the community, hell humanity! the company is doing. Or you have privileged info. Or you think you can outlive competition and then make a killing.

A second order element is how this crisis will evolve? Quick and after some weeks disruption back to gear, long painful? Double or multiple dips with related disruption?
...may you all live in interesting times.

Edit: thanks m_1 and OP for this post and discussion. The reason to comeback to the site and browse through the trash. SBs as well for you sirs.

 
Apr 11, 2020 - 4:42pm

hungaroe:
We have portcos that are going through very challenging times, as customers have accelerated demand and team can't cope with speed of requests.
This is something I've seen as well. How are you supporting these? Are you a CVC or traditional?

Thanks for your comment, it was an enjoyable read.

I am permanently behind on PMs, it's not personal.

 
Apr 11, 2020 - 10:19am

brotherbear:

And while a lot of PE investors think they have the latter skill set, they don't. That skill set is much rarer than people think and is obviously not acquired through any length of time spent as an investment banker. It's more of a consulting skill set, but even then, it's quite rare. There just aren't that many high quality operators you can drop into a rough situation who will find a way to survive.

This 100% matches with my own observations. As a general rule, PE guys think they're the smartest guys in the room, and most challenges are met with some version of "well, how hard could it be?"

My former partners were discussing an investment thesis where we would essentially take a large, very people-intensive business, acquire a much smaller business with advanced, relevant technology capabilities, and "upgrade" the larger business (and fundamentally change its cost structure) with the tech.

One of them (who had never run a company) said "right, so we'll slam these together and then flip it. How long should that take? 60 days? 90 days?"

He was not kidding. A lot of PE guys don't know what they don't know and it doesn't bother them that they don't know.

brotherbear:

As a result, I have to wonder how PE investors intend to put their money to work this time around. Salivating over seemingly low prices for assets that will need restructuring seems short-sighted to me. If you can't actually handle the workout yourself, and there aren't nearly enough people with that skill set to handle all of the distressed situations that will present themselves over the next year, you won't be able to make the operational changes you need to effect turnarounds. I know for a fact that several of the large distressed debt houses are already locking up mid-market banks and boutique consultancies with exclusivity clauses for this exact reason. That said, I suspect that a lot of investors haven't thought that far ahead yet, and are going to be surprised when they learn just how hard it is to find decent operators during the crisis.

I think you're spot on. Buyers won't realize the challenge they've undertaken, they'll just look at their models and go "hey revenue was supposed to go up by now." By that time, they'll be looking for third party help or new management teams, and they'll be 6-9 months behind the eight ball.

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Funniest
Apr 11, 2020 - 1:11pm

Dead-ass accurate assessment of basic PE attitude.
- I'm too smart to have a problem
- Ok, I have a problem but it should fix itself
- Hmm, well this is a stubborn problem but since there is no one smarter than me, no one else could fix it
- We'll just throw some cash at it and let it bump along as a zombie company.
- You know, this PE thing is tougher than it looks.

 
Apr 10, 2020 - 5:12pm

Wow this an absolute goldmine of knowledge and wisdom from you guys. With the industry knowledge and private markets experience you all have, will you be picking up stock in your own portfolio on companies you believe have been unfairly hammered?

Side note, @Jeff you should do an AMA on this site and give your background. Sounds like you're well seasoned in the industry and us young bucks could gain a thing of two from you.

 
Apr 11, 2020 - 10:47am

TheFlyingKiwi:

will you be picking up stock in your own portfolio on companies you believe have been unfairly hammered?

Nope. Truth is, I don't trade stocks. I have a fairly diversified portfolio - a chunk under active management, a chunk I manage myself in low-fee indices, a chunk in private operating businesses, and a chunk in real estate (not equal chunks).

I think I can generate "alpha" in private, illiquid markets where access to information is unequal. For me, that's real estate in very specific markets, and private operating businesses (my day job). In anything else, I'm just another guy with no advantage - so trading my own stocks isn't investing, it's gambling.

I hate gambling.

Array
 
Apr 11, 2020 - 1:54pm

That's similar to my mentality. I just have my retirement and Roth 100% equities since it's a set-it-and-forget-it thing for me.

Do you own the actual units for your real estate portion? If so have your tenants made any rent modification request?

 
Apr 11, 2020 - 4:40pm

I love this thread. Layne Staley, thanks for kicking it off.

While I hate that this pandemic happened and is creating such a significant impact on so many people's health, happiness, and personal finances, I think many of us here would admit it's fascinating in the abstract to live and work through.

Over the past couple years I've been frustrated facing unreasonably high multiples for businesses that don't support them. This has led me to pursue some different transaction types than before, like things in credit, business formation around some kind of exclusive rights, or a business unit carve-out.

Here's an example of my frustration.

In the second half of 2018 I identified a decent-size asset (couple billion) that ran at shit margins because their entire technical architecture was duct tape and glue holding together a dozen acquisitions made over the prior five-ish years. I spent about nine months diligencing the rationale behind each of those acquisitions. Then I interviewed and lined up operators to effectuate the integration of better technology I found in a tiny young company that I could buy outright. I'm talking carve 70% out of a nine-figure line item. Then I ran my lenders through the synergy math and actually got credit for it. Regardless, the deal would've been over 20x EBITDA and it just felt like shit to make that bet. A strategic bought it.

I looked for other companies in the same sector where I could practice the same idea with a different target. One had traded at 15x before the bigger one I wanted sold. A handful of others had actually initiated processes from eyeing those two deals and were thus all asking for something between the two recent comps: 15-20x.

So since then I began focusing even more on the other opportunities I described.

I found a great privately-held business that had zero interest in selling. It made sense, there were mid-teens net margins that generated a fat dividend annually. I did notice that they had a pretty optimized capital structure, so they couldn't really add more debt. I went and found an asset on the other coast that was 110% the size but half the margin, then brought it to them under appropriate paper cover.

Turns out a few years prior a banker had pitched them on something similar with a different asset and brought a sponsor to the table who wanted the minority stake that would result from funding the acquisition to be in a preferred class that granted them control. The company had vomited at that (again, completely understandable) and had some scar tissue.

I structured the acquisition as a NewCo separate from their entity, where I funded the entire transaction, gave them a minority ownership stake, and drafted documents that effectively made the company an operating subsidiary of theirs. Win-win: I owned almost the whole thing, their existing baby remained pristine, they got a call option on the future success of a cost reduction thesis that required nothing other than them practicing their own day-to-day playbook, and I got an asset that would get the double-barreled EBITDA lift from margin improvement and multiple re-rating thanks to higher EBITDA.

In an older deal, I found some guys that ran a business unit buried within a sizable conglomerate of sorts who were incredibly articulate about why their business and the segment it operated within would never grow but how much costs could be reduced if everyone realized that and stopped competing.

It took more than a year, but we were able to design a platform of equals (there was no real single leader) where we got three companies under LOI at the same time with a clear elimination of duplicate costs across them that raised margins almost ten points.

Re-reading your final paragraph, I guess I'm not a perfect fit: I find myself seeing distressed assets right now, but apart from one opportunistic thing that was pure luck that they were in my inbox needing capital, I haven't done successful distressed deals in the past.

I am taking a different approach; I am focused on things where I don't have to shoulder the burden of operating in a challenged environment solely on my own. To the points brotherbear and JS Turnaround made, I don't think there's enough expertise to go around for the coming bloodbath we've only seen hinted at yet.

What made me comfortable with both of those deals I shared was that there were grizzled operators who I learned something from every single time we spoke. They have forgotten more about their space than I can probably ever learn. The fact that we developed enough of a mutual level of trust was special. Secondly, they're both in defensive industries. The first I can't name without making things too obvious; the second is an industrial supplier whose buyers basically can't go anywhere else.

Other than that, I've done a bunch of specialty finance stuff. Nothing atypical for the space: over-collateralization, attractive structural mechanics where you can lockbox or escrow the cash flows, high yields, often esoteric.

To m_1's point, I'm shocked at how slow or simplistic commercial bankers can be. There is stuff that really is not risky that you can charge absurd on-cash returns for that make all the sense in the world for a bank revolver. It's just one of those inefficiencies - it doesn't fit the little matrix the bank guys use to look at the world, so for them, why bother chasing it down - and the guy trying to borrow doesn't have a network to get in front of the special situations shops.

Thanks everyone else for sharing your stories, I really enjoyed reading them all. Great work Layne Staley.

I am permanently behind on PMs, it's not personal.

 
Apr 12, 2020 - 12:35pm

I worked at GS/MS then Citadel in commodities trading. Left for an independent sponsor in NR. Now working on my own. Currently engaged with KKR on a $100mm healthcare deal but was shown a distressed RE asset ($100mm) yesterday. I know nothing about RE.

Could anyone shed light on how they view distressed RE assets at the moment?

 
Apr 13, 2020 - 12:27pm

I used to work in trading. Went in REPE. Left almost a year ago to pursue my own deals.
I kept on being outbid for the last 6 months and losing on deals. Now I call brokers and there is still nothing as it's way too early for mortgage payments to be missed and proper distress to settle in - it will take another couple of months before you do anything there.

Unless we are talking retail - in which case that sector was already distressed, now it will go bankrupt across the board. A bank was desperate for me to take a few shopping centres BEFORE the crisis at the book value they held it at - the equity didn't care about the asset anymore but the bank didn't want to seize the assets just yet otherwise they would have been stuck with this POS.

It's just really hard actually to answer your question. There are so many sectors in RE. From the assets I look at - we are waiting for Q2-20 default on rent payment tos tart appearing before doing something

 
Apr 13, 2020 - 12:30pm

"Goal is to put together a $350-$500M fund focused on Opportunity Zones.

The initial seed is asset will be this asset in Los Angeles- the iconic Baldwin Hills Crenshaw Plaza (https://www.bisnow.com/los-angeles/news/mixed-use/los-angeles-city-coun…)"

Snapshot of what I'm dealing with if it helps. Sincerely appreciate the input.

 
Apr 13, 2020 - 2:06pm

I'll add a comment -
In the GFC some people might have made some money right after it.
I started investing in June 2012 - a whole 3 years after the crisis went by. I did very well, I didn't buy at the bottom, I completely missed it - I bought when things were clearer and more stable but I still made money because valuations were sound and not crazy.

Today all my friends ask me tips on opening brokerage accounts etc... They don't want to miss investing at the bottom. I've unwound almost everything and I am down 4% YoY (I am not including my real estate portfolio, as who the fuck knows where valuations are at the moment and am stuck with it anyways) - I might miss the rally and join later. I also know that had you invested when Bear Sterns went down you would have gotten absolutely FUCKED.

So Layne Staley I agree with you. I am very weary as what other shit is lurking in the water at the moment that still hasn't shown its ugly head. Unlimited printing is not possible or you become Zimbabwe and rates are already at 0% - there is so much a government can do, but when half of the nation is unemployed it becomes harder to stimulate an economy...

I am liquidating on every up move and hording cash. As mentioned to a previous poster above, I've set up on my own - after seeing how badly run the PE fund I worked at (top 5 REPE shop) I realised that next crisis whatever carry I would get would be utterly worthless and I was better off trying to strike off on my own (harder than I thought). Now there is a couple of shitty deals creeping up, but nothing interesting yet. I'll wait - no need to rush. Take a beer can, sit in the garden and relax while funds are pushing all my colleagues to do work that will amount to nothing (banks have frozen new business lending). Patience is the name of the game. FOMO is for suckers.

[EDIT: To add - I mention hording cash, and I think it's the right thing to do - but not for long. As I said I think inflation is going to be BRUTAL. Once we get a more convincing down move I'll start trickling cash back down in defensive stocks and stay there for the time being... I am both private and public market so move between the two. Public because that's what I used to do, and private, because that's what I am desperately trying to do on my own]

 
Apr 15, 2020 - 10:12am
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