Distressed Private Equity Funds
What can you expect to do at a distressed private equity fund? Does that mostly involve operational restructuring and assets disposal or is it more about renegotiating the debt?
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Could be both, depends on the strategy and the team of your fund. Distressed PE fund normally seeks control through acquiring equity, or acquiring debt and then swap to equity after restructuring/reorganization. So depends on the invested firm, it could focuses on either operational or the financing side.
Thank you for your answer! If you are in the operational side, is it usual to take part in the planification of the turnaround or is it mostly about picking a new management team?
Sorry didn't say it clearly. At a distressed fund you won't focus on operational side before you spending tons of time looking at the capital structure. As what abcdefghij said, you will be focused on capital structure for most of the time. You would only consider the operational side once you have already invested, and seek to what you can do through restructuring and reorganization. Once you have enough voting power, and the invested firm does have the chance to turnaround through operational side, then you start to really deal with the operational side. It's true that it's tough to get control of the company, but there are some funds who constantly seeks control opportunities and are not interested in too much of the trading position. That's why i said it also depends on the strategy.
Distressed PE investments is much more about understanding capital structure than making operational changes. This is because 1) you typically won't have control of the company until at least post-emergence, which takes months and 2) you often end up as a minority (non-controlling) shareholder because of all the other creditors who are also getting a slice of the equity
Having done DIP financings and serving as the stalking horse bidder on a few deals I am not sure that I agree with your second point. Typically in a BK scenario the senior debt will be made whole, the subordinated lenders will also be left in a decent position depending on the value of the collateral, and all the unsecured lenders will just have to get in line. Does your second point refer to a post-petition scenario?
Also, to say that you are not concerned with the operational side in distressed PE is also incorrect. No sense in cleaning up the capital structure if you dont think you have the right management and go-forward strategy in place.
Ok thanks a lot for your insights. So if you stay on the financial side, what are the main steps from the point where you know that you could invest in a company to the point where you exit the investment?
Also do you know resources I could read to get more understanding of PE distressed funds?
To further explain, most of time distressed funds are pretty flexible across the capital structure. So it won't be a pure PE shop that only looks at buyout opps or a HF shop that only does trading. True that depends on the strategy some funds may be more comfortable to be a debt or equity player, but essentially distressed funds look at everything.
On initial analysis capital structure is the most important thing when you first look at a distressed firm and see where the value breaks- you need to understand the seniority, dig into notes and also consider the local legal system in different countries. Like any other investment, it's crucial to understand the business model/management team and what went wrong - so you need to analyze the fund holistically from both the financial side and operational side.
Depends on your analysis you then propose an investment thesis on what to buy - senior debt/bank loan/unsecured bonds or equity. At the initial stage it's tough to say how you could exit the investment but distressed PE funds will always seek control opportunities (but they may invest in debt first). During your analysis you should also be able to understand the cost structure and the problem of its business model/management - then you could make an initial judgement on where the firm could improve - financial / operational etc. But in general although you won't negotiate with the management on how to improve the operation until you have a huge stake in the firm, you still need to understand both the operational side and the financial side of your target firm; there is no point investing in a shitty company with a shitty business model and a shitty management team.
It's no easy job to say whats the routine of making distressed investment but i think http://www.distressed-debt-investing.com/ will give you some great insight. Moyer's Distressed Debt Analysis is also a great book to start
This is a pretty good answer. SB to you. Essentially a distressed analysis comprises two parts/answers two questions: 1) How much is the company worth?; and 2) to whom does this value flow?
I will echo earlier comments that your level of operational involvement will be extremely dependent on the firm itself. Some outsource all the operational work, or have a dedicated in-house operational team, while others will have the investment team basically work 50/50 on operations and new deals (or whatever work is most pressing at the time). The only thing I will add is that what you will be doing depends much more on where the firm is in terms of its own cycle rather than your cycle. In other words, just because you are a new employee does not necessarily mean you will be working on new investments.
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