Fellow monkeys,
I am currently interviewing for a couple different positions and it would likely boil down to joining a lower MM fund or a distressed / spec sits PE. With the latter, it is worth noting that they pursue a decidedly strong PE focus, i.e. operate in a debt-to-own rather than a simple lending / debt flipping strategy.
Could anyone with experience in distressed / SS PE explain to me how the typical day-to-day activities look like compared to plain-vanilla PE, and especially the perceived advantages and disadvantages?
Cheers!
Bump
A healthy PE - aka buyouts - strategy is like a leech that latches onto an already-performing asset or company (using leverage, multiples arbitrage, etc.) to enrich the providers of capital (that's all they really are, providers of capital; the case for value-add can be made for operationally intensive strategies/add-ons in buy-and-builds etc though). On the other hand, distressed debt investing (or turnaround/special situations), without getting into the names of the analyses, is a creative endeavor and rarely employs leverage because targets often don't have cash flow. It requires more sophisticated decision-tree/scenarios-type of analyses and the value-add often occurs when you jump into positions at discounts instead of leverage + exit w multiple growth/expansion albeit the latter can happen after BK/Rx too for distressed investors. Distressed often more risky too (think of the core through opportunistic on the RE funds spectrum). The skill set, in my opinion, commands a premium for the services of the practitioner/investor (sell-side or buyside) in the long haul because it's harder to come by and the human mind/skill-set/expertise serves as a bigger value add in these complex cases (more often than not).
Anyone with distressed PE ecperience who could shine some light?
sure but can you make your question a bit more specific. i work at a distressed/special sits pe fund that does exactly what you described above but have never worked at a regular buyout shop
Thanks! In short, I am interested in hearing how close/distant your work is to what you typically would expect at a traditional buyout shop. I.e. how much time do you spend looking at the company, its business model, equity story and how it can be improved vs. how much time do you spend looking at capital structure, different instruments and reading through covenant documents?
Have worked in both traditional LBO and distressed.
Simply saying distressed doesnt help narrow down the sample set. For insrance, Oaktree is a marquee distressed debt platform that specializes in trading distressed securities on a minority, non-control basis (ignoring their PE and HY for this), then there is KPS which is a marquee distressed operational focused PE fund that looks at control oriented transactions either through a pre-pack or 363, then there are the highbridges of the world that are lenders of last resort to distressed companies.
Bit over simplified and there are guys that play across one or more of those categories but that is basically the gamut of "distressed".
Buyout is pure play 100% control transactions via sale processes or through a take-private.
Day to day corresponds with the strategy. Put traders on the left and bankers on the right. Overlay more pureplay market funds as being more trading-oriented while pureplay PE funds are on the banking side. Look at the peoples backgrounds of where you are interviewing and the mandate and you can pretty much figure out what things would look like
Thank you, this is very useful already. What I was referring to was a control-PE strategy, i.e. your KPS example.
The way I look at it is that in traditional PE, capital structure considerations are typically only of secondary meaning and more a 'means to the matter', when it comes to acquisition financing.
How much time are you spending (in a control-oriented spec sits fund) on making capital structure analysis part of your investment thesis? Would your thesis ultimately be based mainly on the assessment of the quality of the company or also to a large part by looking at the opportunity arising from the cap structure?
what are pre packs or 363.
Also - sounds like you have a good amount of exp. How does your group(s) source opportunities in these spaces?
Pre-packaged plan is essentially just something hammered out prior to filing. It may involve a 363 as part of the plan.
The 363 point is just bidding for an asset that is in BK. 363 is a sale process more-or-less like any other
I'll wander in but still struggle to fully understand your question. I think your statement; "...in traditional PE, capital structure considerations are typically only of secondary meaning and more a 'means to the matter', when it comes to acquisition financing..." is less true the more leverage you are trying to put on the business.
I'm not sure that much time goes into "...making capital structure analysis part of your investment thesis?". A quick liquidation analysis tells you who's in and out of the money on which assets.
We generally determine if the company needs a balance sheet turnaround or a income statement turnaround or both. Assuming both, then develop a IS turnaround plan and then figure out the debtor's options; liquidation, distressed sale and the methods of transferring assets. Then offer just enough to gain control of the assets, which can be done in many ways.
I doubt this answers your question but I'm trying to move this along.
Thank you, this is already incredibly helpful!
Let me in this case try to boil it down as simple as possible: how is distressed control-PE different from traditional PE? And what is the same in both paths?
What got me fascinated in traditional PE was the analysis of a company itself in a 360 approach - from a commercial, operational and financial aspect - followed by the decision to take ownership of this business and then actively transform it in a way which you believe will create even more value.
I now am trying to find out whether this same approach can be found within distressed investing (in the context of a distressed control fund) as I imagine that the work might be much more interesting due to the quirky nature of the situations.
I hope this helps clearing up the confusion at least a bit...
They look at different companies... that is how they are different. Distressed fundamentally looks at a combination of "good business bad balance sheet", "failed operational strategy", and "declining industry" businesses. Regular way LBO won't
They are the same in that they both seek majority control of a company
Thanks. I didn't have the patience/commitment to write another long post
Thanks a lot for your comments, this is very helpful. From what I understand, the way you typically start the process is to build a position in the company's debt and then hope that the company fails to repay the debt and/or breaks its covenants. On the job, can this at times lead to frustration since you do not have full control over whether the company will eventually fail to pay / break the covenants? Or are there other ways you can influence the outcome?
Well, you factor in that you might get refi'd and that isn't a bad situation. This is especially true because a lot of funds, including the one I work at, have their funds setup so they can redeploy or recycle capital from investments. So if we invest in a company and after a year they are able to refi us, we may only make 1.5x but we can put that money back to work in another investment = $$$
This is pretty much it. We look at it.. and do the business underwrite/valuation and look at that in conjunction with the evaluation of the capital structure. Depending on the fund mandate some guys will take the 1L, some that wear a bit more equity risk will take the 2L, then the guys that you think of distressed PE will take some 2L and a chunk of Unsecured... All of this assuming the above structure would apply.
You don't control the company's operations pre-rx nor can you stop them from refi'ing you. Personally that is best case. I don't have to deal with a turnaround/operational lift or headache and just get cashed at par.
Distressed sale vs. regular sale (Originally Posted: 10/20/2014)
Hi all,
First time poster here.
Could someone please help me understand how exactly does a distressed sale (or M&A transaction in general) differ from a regular one - in terms of the actual "work" (I understand the contextual difference)?
Cheers!
Short answer is that it doesn't. The work is the same; it's just different circumstances.
Longer answer is a 363 sale in the special case of companies undergoing a chapter 11 process, but I'm too lazy to explain right now. But really it's just a court-approved distressed sale under a slightly more formal process.
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