Special sits & distressed vs buyouts?
As an exit opp, post IB or just as a career path in general do people think special sits is more intellectually stimulating than buyouts or vice versa? Throwing out a few examples of special sits / distressed firms off the top of my head - Beach Point, Sound Point, Victory Park, Centerbridge, Atalaya, Tennenbaum (now Blackrock), etc.
Pros and cons of both investing styles, hours, comp trajectory, etc. insight would also be helpful
Buyouts = banking 2.0
Special sits / opportunistic / etc. = banking in 3D
I really like the comment above and tend to agree somewhat.
I worked in both mega-buyouts and in special situations focusing on private investments across the capital structure. I prefer the latter, with a caveat.
Pros of special situations: Incredibly intellectually stimulating, hugely educational across all aspects of deal execution and structuring, you can analyze any asset class after that experience and really understand what makes a good investment (and become a good sector-agnostic investor yourself!) Also, lots of freedom in deal origination, which I like. Sometimes higher comp (or at least higher numbers are more front-loaded due to more volume of deals / exits).
Cons of special situations: Unpredictability of hours (distressed often happens on a Fri night), more limited resources during the monitoring stage of your investments compared to buyouts, and tougher to explain your resume at exit to regular PE people. Also, I met lots of people with superhuman intelligence who are incredibly unpleasant or even toxic on a personal level and somehow are allowed to get away with that.
Pros of buyouts: More glamour (more formal dress code, better lunches, higher travel budget, better hotels, more team-building events), more resources during all stages of the investment cycle, generally intelligent and pleasant people (certainly more charismatic compared to the above), clear investment mandate that leads to a more structured career. Everyone understands your resume at exit.
Cons of buyouts: Most deals die. Most PE investors in large firms are sector specialists. No freedom of deal structures and less freedom in deal origination. Cyclicality: even if multiples are at all time high, you feel like you have to do deals (whereas my view is that you should focus 100% on selling your portfolio companies during such time). Constant stress about the investment period and "getting deals done", which may lead to executing some investments that are not the greatest. Risk of damaging people's lives due to putting excessive leverage on companies and contributing to financial distress: I would not have liked any involvement in Toys R Us and or similar deals.
If I had a choice again, I would go to either place and would base my decision entirely on how much I respect and like the people on the team. As, mandate aside, it is the people who will make your life either amazing or miserable.
Good luck!
Appreciate the thoughtful answer. Very helpful and great to get insight from someone who has been on both sides. Cheers!
Tamara - As I have said before, I am perennially appreciative of your great answers on this forum.
One thing I want to understand better, and that I have been thinking about all day, is how you say in special situations, you can become a good sector agnostic investor. Can you say more?
I have seen many “good” investors (I cannot evaluate beyond the fact that they are MDs at UMM and MF firms) make investments that might be only one standard deviation away from their speciality (eg an investor advertised as a specialist in “Services Business”, who is actually a specialist in “Business Services”, crash and burn when they enter a semi-adjacent sub-vertical within “Services” broadly, such as “Government Services”. (I realize Government Services may not be the best example due to high regulation, but I think you get the spirit of my example).
Do you mean to say that special situations trained investors won’t have this problem in say, a corporate PE context? Or do you mean that they will sector agnostic in just special situations? How far does this truism extend: Growth equity? Venture capital?
If you really do mean one can use special situations training to be sector agnostic in other asset classes, that is a compelling reason to seek that training; hence, I’m hoping for an elaboration on what you mean to say.
Thank you again as always. Admittedly, I ask this as someone who fits the “generic PE guy” description above, but aspires to be more than that.
Thank you for your question.
First of all, being a good sector-agnostic investor does not equal having a good private equity career. There are far more sector-specific / specialised jobs in PE than sector-agnostic, generalist investing ones.
Second, there is often no sector or product specialism in special situations. Unfortunately, there is not much structured training for juniors either. You learn on the job to dissect any industry, business model, understand economic return, structure an appropriate instrument and effect an exit.
I feel like I am not answering everything you wanted to ask - please feel free to pm me, so that I can be more specific, thanks!
please tell us more about how people in buyouts are universally more charismatic than those in distressed hahaha
I love your veiled attack. Love it!
Did I say universally? No, I did not say that.
If you think about it though, the buyouts guys face fierce competition from other LBO shops. Every deal is a crazy auction. They have to court management teams and vendors. Ultimately, they get paid for being good and effective salesmen of their capital. Good salesmen have to be charismatic, no?
Special situations guys, however, pride themselves on their intellectual honesty and ability to provide super smart solutions to challenging situations. They get paid for looking at truly hairy deals and restructurings. They don't need their charisma for that. Often, there is nobody else in line looking at the same transaction. Many people in special sits have a trading floor background, so they often grow up in a different culture. And I have come across a small proportion of people who can run a Black Scholes model in their head for some clever permutation of out-of-the-money warrants, but refuse being civil with others. And, while I appreciate their intelligence, I think their attitude sucks.
This is my personal opinion based on my personal experience. I am not getting into any more of this though.
Okay, guys in buyouts are more charasmatic than those in special sits.
Special sits has a tinge of HF culture, find any way to make money around a situation, and then do it. The wonkier and more off the run, the better. Much more of an emphasis on intellectual horsepower and dynamism.
The buyout skill set generally pretty cookie cutter. There is barely any differentiation between megafunds, UMM, etc within their respective cohorts. So you have to work the softer skills much more so. The reason someone above said its banking 2.0 is because it sort of is. You cover a sector, you develop relationships with all the companies in that space, and you make sure you’re there when a deal transacts. There’s a heavy sales component. Organizationally, its much more mature and crowded. So there’s also a pretty heavy politics component.
Hi Tamara,
I was wondering what are some common instruments and deal structures that distressed investors use?
For instance, I was interested in rescue financing/recap where sponsor puts in structured instruments. I've seen instances where the sponsor puts in bulk of their capital as a senior secured (PIK) along with warrants (c.20% of equity) eg. Oaktree and Diamond Foods. In these cases where majority of capital is structured as snr debt how would the sponsor generate 20+% IRR? Under base case scenario wouldn't the bulk of returns come from snr debt principal + pik compared to equity proceeds from warrants which would be small compared to money invested
More generally, what are some unique structures (other than buying fulcrum security and converting to equity) sponsors use to 1) protect downside while 2) enjoying equity like upside to deliver PE like returns.
Unfortunately, it is impossible to generalize and you are asking an impossible question. Every deal is different. Not at all special situations are distressed situations. Every deal might have a highly tailored structure. What helped me in my career is to understand minority equity deals with earn-out mechanisms and warrants; hybrid debt; convertible structures; credit default swaps for hedging (great for country risk); puts; and currency hedges. In terms of deal examples, I would look at publicly available info on private deals done by Oaktree, Och-Ziff, etc.
Both have their pros & cons, but an underrated difference that I feel like doesn’t get enough attention is that distressed situations can often be contentious/negative environments (moreso than usual M&A).
It might be true for distressed, but not all special situations are distressed deals. In my experience, distressed was a minority of our mandate. Special sits is often some clever, hybrid form of financing with some protections and amplified upside.
As Tamara_S has done a good job of pointing out, the two jobs are innately very different. Many traditional buyout firms pride themselves on chasing and acquiring high quality businesses which may be undervalued by the market or companies they feel would be run much more efficiently in their hands (making very broad generalizations here about the investment mandate of course). Working on the distressed/ss side commands a few challenges in that identifying such opportunities, and often times across the cap structure, can be very challenging and that the actual process post-invest can be quite tenuous and contentious with multiple parties at once given the frequent involvement of pre-existing creditors/DIP guys depending on the opportunity and that often times the distressed world can usually end up in a court-led sale or restructuring process
“Special Sits” is less a term that refers to an actual strategy, but more of a catch-all term that is thrown around to capture a whole range of things i.e. growth, credit, hybrid, distressed, structured financing, risk arb, turnaround buyouts, minority, etc, etc. Funds use this term to retain flexibility to invest in different parts of this situational spectrum depending on the market environment.
Some of the firms you name - Sound Point vs. Atalaya vs. Centerbridge, among others - do wildly different things with different risk/return profiles and almost would never sit across the table from each other. Sound Point in particular is just a CLO shop that has vastly different caliber folks vs. other firms you mention.
It is a wildly misleading exercise to characterize some of these strategy types as having some stereotypical personality or career prospects. The dispersion between individual firms and groups will overshadow any observable differences you can find by looking at the entire asset class. Look at the firm, track record, actual deals, workflow, and people (most importantly your senior partners/PMs).
Please do not make contrived generalizations about what a career in “special situations” look like vs other strategies, this is not even a real discussion until you get to the actual asset class, firm size, mandate, team structures.
What are your thoughts on the Atalaya and Victory Park’s of the world and how do they fit in the special sits mandate based on your experiences with them? Do you think both have top caliber professionals?
Bump, curious about Victory Park as well.
Oaktree SSG vs. Goldman SSG. Who are you taking?
Goldman SSG have a way broader mandate than Oaktree.. just one datapoint
He's probably trying to reference Oaktree Opportunities (Oaks flagship fund) which has a pretty wide mandate and does most of the cool distressed deals compared to Oak SSG which is primarily middle market focused.
Interesting... IMO I’ve thought of these two as the preeminent operators in the space, which is why I posed the question
OP, objectively healthy PE is better, easier, more exit ops, more glamorous, less risky and probably pays better. Everyone in the world will pick healthy buyouts except for two groups; (1) candidates who just aren't blue-chip enough to be recruited and (2) quirky weirdos who are somehow turned off by all of that and want a little more jungle warfare in their life.
Distressed is absolutely more intellectually stimulating. Speed helps make it more interesting/stimulating. Lack of a crowd and lack of a formal selling process make it so much more interesting. Straight up healthy PE reminds me of an art auction at Sotheby's; Let's all dress up real fancy, drive our Rolls to the auction, overpay for an asset within a highly choreographed sales process and then bake in the warm satisfaction of compliments from my peers for overpaying on such a choice asset.
I look at special sits (insolvent C&I businesses in my world) as trying to defuse a complicated bomb that everyone is running away from, under the pressure of both time and fear of competition. Any classically trained MBA in the world would look at these situations and rightfully proclaim that it's too far gone, hope is lost and they will fail to make payroll in 3 weeks. Every single fact supports that conclusion. Plus there is all sorts of liability, risk and (quite frankly) shit swirling around the deal. Any gentleman would quickly run away, shower off at the club and return to the auction house with his chums. But if you just sit there and stare at the flopping corpse in a shitstorm, and think deeply, solutions start coming to mind. And if you stare long enough, creatively enough and fast enough, you might see something that no one else has seen - a new method, structure, plan, partnership, angle of attack. And if you can develop a thesis fast enough you might outpace both the pending insolvency and your competition and walk away with an uncontested great deal. Well, at least an uncontested great thesis. 2/3 of the fun is turning that crazy thesis into a reality. And that is way grittier, exhausting and more intuitive that getting the deal in the first place. Compare that to the soulless thesis of; "We'll buy it at 6X, not fuck anything up and sell it for 9X".
I'd say personality fit is most important and being honest with yourself about where you'll be most at home.
Just from perusing team pages, most people at the top special sits teams seem to fall into the quirky weirdo camp... If you look at the best places, Arjay Miller scholar, Palmer scholar, or baker scholar is the prerequisite for senior folks...
So if you want something more intellectual stimulating you’re a quirky weirdo. Nice dude
Awesome write up tho
Feel like there's a lot of opportunity for huge returns in special sits though
Aperiam aut quam dolorem iste placeat vel. Et itaque sunt deleniti iusto odit expedita nihil. Modi sint inventore veritatis deleniti vero consectetur accusamus. Inventore error quaerat alias aut quas.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Repellat impedit nihil sed nostrum repudiandae perspiciatis. Praesentium doloremque sed soluta accusantium ipsam eius totam. Dolores nostrum eum nostrum deleniti aut tempore sit. Excepturi voluptas omnis voluptatem odit sint rerum.
Provident quo rerum repellendus a voluptas cumque. Pariatur et ex facere eius quis libero sequi ut. Excepturi ex et aut enim sit eius aut.
Voluptatem minus exercitationem consequatur voluptas sit dolor rem fuga. Enim necessitatibus odit illum placeat similique quo recusandae similique. Quibusdam illo amet ab quibusdam laborum voluptatibus voluptatem illo.
Recusandae in hic nam ut exercitationem in ea aut. Qui sit est consequatur impedit necessitatibus quia odit.