Personality needed for distressed debt/special situations

Hi guys:

I'm looking to swtich from PE to distressed/special situations investing. For those of you already in the industry, I'd really appreciate your insights on the following!


  • What are the personality traits that are needed in special situations/distressed investing that's hard to train or learn? In PE, I would say it's an ability to be very diplomatic and politically cunning (esp. in large cap, at large funds), a skill that's hard to learn but help you both internally and with management teams

  • What makes a stressful day stressful in distressed investing? In PE, to me, it seems like it gets stressful when you are on a deal and trying to juggle a million things at the same time - it's not easy to switch mind gear back and forth so much 

  • How good do you have to be with stress? Some of my friends in HF say that you have to be very good at stress if you work at one of the L/S funds, not sure if this is the same for distressed?

-Lastly, if you are already in the job, what aspects of your job do you find the most difficult? What aspect of your job do you dislike the most?


Thanks!

 

I can't really speak to the distressed debt side of the special situations universe as I spend 90% of my time in equities. I think getting into special situations you need to be prepared to deal with the following:

1) You're often dealing with junky businesses or hairy situations where the value derived from the situation is rolling up your sleeves and figuring out if the security is mispriced vis a vis the hairiness of the situation or junkiness of the business. You're not going to be riding high on disruptive FANG type names changing the world where you make money on them continually beating numbers and compounding value. 

2)  As a result of (1) you're going to be spending a lot of time on value names with a catalyst- thats been a terrible asset class vs growth last few years but depending on the seat you can still put up serious numbers.

3) The firm's success and to some extent your success will be highly dependent on its investment approach and investor base. Does the firm have locked up capital? Do lps accept volatility/illiquidity in exchange for the promise of outsized returns from idiosyncatric situations? Does the firm try to determine the outcome of its invsetments (activism, get on steering commimtees etc) If the answer is no to any of these I'd be wary.

4) Is it a generalist seat? If yes then you might want to consider future employability as a generalist vs a sector specialist

I will say though the distressed/credit part of special situations can be very interesting and is less commoditized than the equity part of the strategy so there is that to consider as well

5) In terms of dealing with stress - the stress I deal with (on the equity side) is owning hairy, complicated situations where Mr. Market doesn't give a sh*t and would rather just keep it simple and own growth. The joy of the job though is being "right" and seeing value from your investments when the rest of the market is asleep. 

 
Most Helpful

From a personality standpoint, in my opinion it helps to be very even keeled and not overly emotional. Often times your positions will trade down before they get better. Interestingly enough, many times this is preferred as you can buy lower and add to your position. The very nature of distressed makes its very hard to bottom tick the price so for many it is hard to stomach price declines. In distressed there can be violent gap downs, 20-30+ points from the last trade. Many people freak out, which can mess with judgement or emotions or both. In a similar vein, it takes way more conviction / managing through self doubt when others are selling and you're buying, especially at low prices. So you need to be okay with being somewhat of a contrarian, or at least be comfortable having a contrarian view. In PE you're likely bidding on company among other bidders so its more making sure you don't over pay vs going against the grain. That all pertained to buying. Once you're in a position, you need to be good at negotiating and seeing the forest through the trees. Lot of hard asses in distressed, I think a healthy balance is best buy that I mean you want to drawn a hard line when needed while also being constructive. 

A stressful day can be when you have a name that gaps down 20-40+ points. Or if you had a thesis and a company reports and they underperformed your expectations which might reduce the window of time to turn things around. Unlike PE, I think a lot of the stress is outside of your control. As far as the workflow is concerned, I don't think its juggling as many things in short order. 

Similar to what I said above, I think its better to have a more tempered personality. Much of the stress is out of your control and not getting emotional helps make more effective decision. There are the PMs that get emotional and it negatively impacts their trading, especially in a rough patch. Think going on tilt in poker. 

A difficult aspect of the job, or frustrating, is you can have an idea and just not be able to source enough bonds/loans to execute. Often times in distressed you need to act quickly before supply dries up. There isn't a ton of volume. The other thing is just dealing with things that are outside of your control. One firm might punt a position just to get out which messes up the marks, though the trade is more technical in nature. 

 

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