Navigating Distressed HF space and recruitment

Intern in IB - Restr

Hi all. Previous intern / now incoming 1st year analyst at an EB RX (PJT/HL/EVR/LAZ). there's a lot of visibility on PE recruiting on these forums, but less so for distressed recruiting. I've searched for and read some helpful posts and still have some remaining questions if anyone can help me out:

  • I notice a lot of distressed HFs go off-cycle. Which ones go on-cycle and who are their headhunters?
  • Is it better to start your career in a smaller shop? larger distressed fund? or how about MF credit arms? <- I see a lot of debate on this but not a lot of consensuses
  • What are interviews like? Especially for how early on-cycle goes how much RX experience will they be expecting?
  • If HFs want a pitch, will they be expecting a distressed pitch? I ask as it's hard to pull certain credit docs and prices without Bloomberg.

Thanks, everyone. newer to WSO as a poster but I've loved lurking.

Comments (23)

  • Intern in IB - Restr
May 30, 2020

@DistressedFund123" Just wanted to tag you as i've enjoyed a lot of your posts

  • Analyst 1 in IB - Gen
May 30, 2020

I'd also tag @sling shot" as he seems to have experience working across both mega funds and pure HFs.

May 30, 2020

Following.

Array

  • Associate 1 in HF - Event
May 30, 2020
  • Intern in IB - Restr
May 30, 2020

Hey, appreciate the reply. I saw the post, was definitely insightful but I'm not from an M&A background so I didn't know how much of it directly applied to me, specifically as it says "people adjust expectations if no RX background"

  • Associate 1 in HF - Event
May 30, 2020

Maybe you'll get asked a little bit more about restructuring, but it's mostly just discussing your deals and doing cases.

  • Incoming Analyst in Other
May 30, 2020

Incoming FT at a distressed fund. Maybe I can put some colour on what to expect in interviews if that's helpful. I saw another thread here / in the PE forum about expectations for RX exp, but not qualified to comment on that. My experience might be different than the one you might go through from IB but I was also competing with IB / PE / HF guys for some positions so might not be too different.

From my exp, most funds will at some point want a pitch (to address your last point). It'll be great if you could discuss a distressed pitch but I would do that only if you know the in and out of the case. eg. I had worked on a distressed opportunity while working at a special sits fund so I knew the case inside out and was able to discuss the opportunity in depth at my later interview at a distressed fund. Turned out the fund looked / was involved in the same opportunity so I was lucky to have discussed that. If you come up with something, it's likely that the people at the fund already know about the case / have some general idea about it. It's better to pitch a case that you know in detail than one you would half ass. Most funds will probably also have you do case studies. Main focus is on understanding debt waterfall and cash flows. Case studies that I had to do were along the lines of "here's a name XYZ.. go through the cap structure and see if there's anything interesting and if you would invest in it. Why / why not?" Depending on the time you get for these case studies (I've done case studies ranging from a week long to only 24 hours turnaround), you get an idea of how in depth you need to go. Some might be fine with you arriving at some creation multiple and justifying it, walking them through a waterfall, etc. Some might want you to identify specific nuances / walkthrough in detail. I've had a share of both types. At the end everyone just wants to understand how you think about the opportunity and how you triage.

Pitches can be asked at any point of the interview stages. I've heard of some HHs asking for pitches? Although I'm not sure. I've been asked for pitches / ideas in the first round and sometimes not until the later stages. It'll be a very good idea to have at least 1 pitch going into the interviews as I would expect that to be asked at some point - I've never had an interview where I wasn't asked for one. Obviously try to have one that is relevant to the fund's strategy but don't try to half ass anything as it more often than not backfires.

I wouldn't worry too much about the part about not having bloomberg. Maybe you can get docs / prices by asking your friends who have access. Worst case you can go to finra's bond screener and check. Tedious but that's an free for all access way. CapIQ also has decent info on the debt layout that you can use to get docs / prices. Lmk if you want me to elaborate more / have more questions about my processes.

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  • Associate 1 in HF - Event
May 30, 2020

incoming from MBA or from undergrad?

  • Incoming Analyst in Other
May 30, 2020

I was lucky to land a seat out of undergrad

  • Intern in IB - Restr
May 31, 2020

hey, congrats on landing an FT seat at a distressed fund and thanks for the response. I also asked this to the person below, what's your typical pitch / case study process? i've gone through a ton of stuff like Moyer, just curious now what a good method or framework to look at distressed investment opps are. thanks

  • Incoming Analyst in Other
May 31, 2020

Tbh I just went through moyer and the hl rx case study before my first one and felt that was enough for prep, everything else you can pick up as you do the case study. Depending on what type of stuff your fund looks at you can triage accordingly. Unless you get unlucky and land some very difficult case, most should have simple cap structures to go through. Since most of my case studies were "here's a name XYZ... go" I had to start from scratch.

For me, first step is to read up on business and industry to get an idea of background and what they're going through, what's the deal with the company, etc. Quick idea of financials (very quick - EBITDA, cash flows, etc.) Then look at cap structure and try to get an idea of where each tranche sits and where they trade. Then that will usually give me an idea of what tranche to look at first, which docs to read, etc.

At the end all of them are just looking for an answer to "would you invest? why / why not?" so if you say yes you want to back it up with a solid reason and at what price / multiple would you be comfortable buying. You would ideally find a tranche that sits at a good spot in the cap structure at an attractive price that has maybe some favorable nuance as well (maybe you identify some interesting subordination or legal point, etc.) and is backed by a good business - this is just a combination of going through docs and understanding the business / assets. If your answer is no, then you want to ideally back it up with a solid reason too - are you saying no because the business / assets are bad? why are they bad? Are you saying no because of some other reason? Something to justify each answer.. you get the point.

You don't have to necessarily say yes / no. I've also given the "maybe answer" sometimes i.e. I would invest but not right now - back this up by whatever you think is why eg. price isn't right in the moment (think about what price or multiple would you be comfortable at), environment isn't favourable right now (what changes would you like to see), etc. again obv give justifications for your reason. Of course with all case studies, you also want to think of the downside / risks to your thesis - be prepare to discuss those as well.

Depending on how much time you're given and if you can get some idea of what level of detail they expect, you can go easy / deep on some of the steps. Not a set layout you have to follow, this is just something that helped me while doing the case studies. Lmk if you want me to elaborate, happy to help. You should be in a good spot - all the banks you mentioned are very good and I'm sure you'll land some great interviews down the line

Most Helpful
May 30, 2020

Was in the same seat as you so happy to help.

  • The headhunters to focus on for distressed HFs are Robin Judson + DSP as main priority then definitely speak to SG, SearchOne, Henkel, Amity, CPI, GoBuyside (they've done Caspian before which is also a known to takes kids out of undergrad etc.)
  • On-cycle funds are typically the large megafunds you think of (Sixth Street, Oaktree, GSO, Centerbridge, etc.) but generally speaking the ideal non-two and out seats are off-cycle HFs that may end up just aligning timing wise with general recruiting your class goes through
  • I went to a larger fund and I have friends at smaller funds, from Caspian to Marble Ridge to Riva Ridge. I generally think that it's better to start at a larger fund and go downstream, not too hugely dissimilar from private equity. The caveat is joining that is known to be 2-and-out as it just becomes annoying to have to recruit to another firm if you can land an ideal seat without needing to fund-hop.
  • On the mega-fund vs. pure HF; there can be huge cultural differences and ways that firms are different. I'd recommend reading the below threads, #1, #2 and #3, for further info but generally speaking lower overhead / smaller investment team of pure HFs are a big advantage when you think about advancement / compensation / cultural factors
  • The more actual deal experience you have, the farther you can speak to your knowledge which will go a long way with them trusting your capabilities. If you are coming into an interview with absolutely no deal experience and only pitches, i don't think you will get very far in the interview process (you shouldn't worry about this though being at RX EB)...interviews happening Jan-April your first year means you should have at least 1 or 2 deals you can succinctly speak towards as a 1st year analyst
  • I never thought it was totally necessary to go balls-to-the-wall with a brand-new templated distressed credit pitch while interviewing (as a banking analyst...if you have buyside experience definitely expect to be asked about pitching a credit no-questions asked), but it was certainly necessary for you to be able to take a view on your active deal experience capital structure. A lot of times, you don't even need to pitch a credit as RX analysts are just given leeway to speak about their deal experience...and given the analyst will have private info they should be able to better articulate why a certain bond/loan in the structure may be trading rich or cheap to what you think value will be (without revealing MNPI of course...worst thing you can do to a fund is accidentally restrict them).
  • With that said, me and my good friends personally did prepare a topical other credit pitch that followed the mold of long/short of a "yieldly note". The process really starts to roll when you are doing case studies for certain firms and borrow all that work to pitch to the next firm in the in-person interviews. That is hugely understated advantage of doing a broadly-targeted interview process. I remember work I did on shorting Jack Cooper secureds as a case study became immensely helpful in in-person interviews when they asked me about a credit I currently think is mispriced
  • if you want to pitch, stick to a publicly traded company as then there's no public-information gap. You don't have to focus on hugely complex structures as well (i.e. I remember kids at interview at my fund getting WIN pre-Aurelius decision as a case study which sucks when you are a 23 year old trying to decipher that all)
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  • Intern in IB - Restr
May 31, 2020

Incredibly helpful, thanks man. A few follow ups:

  • do ALL of the MF credit positions follow the two-and-out + MBA-to-return path? I'm aware that funnel exists for PE, but for the credit side is it really that prevalent?
  • curious if you have insight into MF structure within overarching credit arms. I know OAK breaks it out, but places like GSO, Apollo Credit, KKR, etc., do these places recruit specifically for distressed positions or do they recruit broadly for credit and then you have to "place" into a distressed seat after? Might be a dumb question sorry
  • re: deal experience, the worry here with on-cycle is how early it is relative to deal experience. Last year it was in september, which wouldn't lend itself to that much deal experience. Obviously off-cycle is a different story, but in light of the on-cycle acceleration do you think the pitch will be more prevalent?
  • Helpful advice on rolling pitches over. I'm wondering what your typical investment / case study process is. For example, relatively straightforward process to start looking at an equity name, but where do you start / look for a distressed pitch? obviously start by understanding company fundamentals, but then what? determine cap structure and go thru credit docs? try to figure out org sturcture? etc. Lots of informational resources relating to distressed out there (i.e. moyer) but exact process is a little bit blurrier.

thanks again. happy to take to PM if easier

Jun 22, 2020

@Intern - I work on a megafund distressed team so I can speak to my firm (not sure if others may be structured differently)
1. we do not have a 2-year program in credit and expect hires to stick around to principal and beyond
2. each team manages its own separate recruiting and we recruit specifically for distressed
3. our team doesn't hire often enough to do on-cycle

  • Associate 1 in HF - EquityHedge
Jun 22, 2020

At Carlyle it's a very distinct group.

  • Incoming Analyst in IB - Restr
Jun 22, 2020

How large is the team? How does recruitment work out of these MF distressed teams?

Jun 22, 2020
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