Distressed NPL analyst: interesting or boring?

Guys,

After over 2 years of TMT M&A for a BB IB (which I did not enjoy very much), I have been trying to get a position within an HF. Distressed debt was one of the options, hence I am now considering a role within an HF (c.$10bn AUM) which focuses mostly on distressed credit.
However, the position is within the non-performing loan (NPL) portfolios team, which focuses on SME and consumer debt (transitional and stabilised RE, unsecured loans, etc.).

I like the role, but I am not fully convinced; it is obviously something very different from what I have been doing so far, and I would like to have a more comprehensive view on the position in order to take an informed decision...

Hence, I would have a few questions; any help would be highly appreciated:
- Is NPL a relatively low risk/return business within the HF industry (compared to corporate distressed debt for example)? Any view of what a good (post fees) IRR should look like?
- Are fees significantly different from the "classic" 20/80?
- Should I not like it, what are the potential exit options? RE PE funds? Would it be hard to move to corporate distressed debt?
- What are the hours like (very approx.)?
- What could I expect as salary (possibly both fix and variable) with my experience?

Thanks in advance.

Comments (6)

Best Response
Nov 18, 2012 - 12:41pm

To help you understand the area, I will walk you through the typical deal process.

Origination:
Deals come in through either a large broker or one-off from banks. From a large broker like DebtX or Mission Capital, it is usually a large bank like BofA who is selling. These deals range from $10MM 5 relationship 5 loan 5 piece of collateral pools to $300MM 100 relationship 250 pieces of collateral pools. They will release a "data tape" that usually includes info like unpaid balance, collateral type, appraisal info, other loan info, payment history, and some commentary. You need to decide what you would pay for the pool. Is it performing? Does your firm like non-performing loans that have assets worth more than the remaining balance or the opposite? Which borrowers are likely to go BK? Which ones will you likely settle? Which ones will you foreclose and get the keys to the RE? After you answer these questions, you forecast CFs and give a price. Could be 5% - 90% of loan balance.

Invitation:
You give a bid based on the above. If you are close to market or what the bank is hoping to get, you get invited to final rounds. They open the data room which contains titles, appraisals, bk docs, borrower correspondence, and more.

Due Diligence:
Once invited, you really dig into the collateral (usually real estate) and borrowers to confirm the CF thoughts you had during the origination process. This involves contacting brokers, talking to market participants, and diving into the DD files. Questions include: Was the collateral actually released? Does the borrowers financial statements indicate they could do a workout? On a site visit, how strong is the location? You come up with a price for each relationship and submit a final bid. Most of the time you lose; if you win most of the time you're paying too much.

Positives: In the last month I have looked at over 500 pieces of real estate all over the U.S. From a shitty piece of shit in the middle of GA to a 250k sq ft retail center in Tulsa. I know how to value land, retail, office, multi-family, and have seen them in nearly every market. The people I work with know the highway that takes you from the middle of nowhere to the middle of nowhere, and what the RE market is like along the way. You will learn bk law inside and out and will feel comfortable valuing virtually any piece of distressed RE anywhere.

Negative: Same as any RE PE place; you do not work much with public companies and miss out on the M&A experience.

To answer your questions:
Is NPL a relatively low risk/return business within the HF industry (compared to corporate distressed debt for example)? Any view of what a good (post fees) IRR should look like?

  • Once you know what the collateral is worth, yes, it is relativly low risk. Your returns are locked in a purchase - this is RE. Post fee irrs vary based on the property. Decent piece of RE in NY ~15%, piece of land in GA can >50%.

    • Are fees significantly different from the "classic" 20/80?

They are not at my firm.

  • Should I not like it, what are the potential exit options? RE PE funds? Would it be hard to move to corporate distressed debt?

After some time in this industry you should be able to ace any REPE interview and likely any distressed fund interview. Can't comment on corporate DD.

  • What are the hours like (very approx.)?

Varies because you are waiting for banks to decide to sell. Every quarter they shoot up to 60-80 hours, but after the Q ends you may work 40 hours. Also depends on culture. But this could change if (see above) a bank decides to do a sell.

  • What could I expect as salary (possibly both fix and variable) with my experience?

Firm specific and can't compare to mine because i did not do IB and came in as an analyst. I would say it is comparable to REPE funds and less than LBO etc.

Jan 7, 2022 - 10:39am

IDK 'about learning BK law inside and out...' this is usually subchapter V or personal BK's right? No complex reorg's here. I fear an analysis with such a structured process as you describe is ripe for disruption/technological disintermediation. That would concern me if I'm entering in my 20s and depending on this as my main skillset.

As a side note, I think a lot of WSO user's hearts dropped when you said "I don't work with companies and miss out on the M&A experience." "*Gasp*" If this were a bit less structured / less competitive, it'd be more appealing IMO.

Nov 22, 2012 - 5:28am

Not sure why above focused on RE, but many NPL guys do consumer loans mostly (pools of distressed consumer loans, student loans etc) and not necessarily RE. In any case, it's very very different to corporate investing.

Jan 7, 2022 - 11:12am

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