Top firms for distressed investing. Solving for brand and deal experience more than ability to growth within the organization.
I am interested in identifying a list of the top 20-30 distressed debt / special situations groups on the street. I am industry and geography agnostic. I am solving for: (1) learning outcomes, (2) compensation (3) prestige. I am less concerned about (1) ability to grow within the organization (two year program is fine) (2) specific industry focus (3) culture.
This has been posted many times before:
Elliott Management Aurelius Capital Solus Alternative Fir Tree Partners Brigade Capital Angelo Gordon BlueMountain Oaktree Capital Silver Point Capital Canyon Partners Davidson Kempner York Capital
https://www.wallstreetoasis.com/forums/most-active-top-distressed-hedge…
https://www.wallstreetoasis.com/forums/top-distressed-funds
BTW, no one cares about prestige. You care about reputation in distressed investing stemming from actual experience dealing with such parties in an out of court or chapter 11 process.
As an FYI, this is a fairly out of date list. for example:
Solus is winding down and halted redemptions after losing a very substantial amount of money over the last 3 years, something like 30-40% cumulative, maybe more post the recent sell off. There’s an interesting WSJ or FT article about it. Owned a lot of illiquid energy that ended up being complete garbage.
BM shut down their credit hedge fund last year and sold their remaining operations (CLOs mostly) to an insurance company. Also awful performance.
Firtree is a shell of its former self in terms of both AUM and headcount, lost a ton of money in energy.
Brigade is mostly HY and CLO capital, not comparable to the others.
York shut down its core distressed HF vehicle after poor performance and large redemptions. They do some distressed out of their multistrat funds and some pockets of drawdown capital, but most of their dedicated distressed capital is gone. Good WSJ article about it.
Aurelius is much smaller and has lost a lot of capital from its peak. Some interesting headlines last year about how the founder married one of his senior analysts who’s now the #2 there. They garner a ton of headline from their bomb throwing tactics and are clearly smart/creative, but don’t have the scale to take big positions in large cap distressed situations. https://www.bloomberg.com/news/articles/2018-12-19/wedding-bells-at-aur…
In general, I would classify a “large” distressed fund as one that can allocate 5bn+ to the strategy, or regularly take 100mm+ positions (market value not face) in situations, which is important to being in a position to drive restructuring processes. There are maybe only like 15 other funds that would fit the bill. Elliott is generally viewed as the largest and most sophisticated process oriented investor in the space and regularly takes 1bn+ positions in distressed situations. Their AUM generally limits them to only large cap situations so they need to be creative about extracting process value from situations. However, their distressed returns have been poor as of late because they simply bought bad business (tends to be most of the companies in distress in late cycle, for obvious reasons).
Other funds investing out of multi strat funds but that have traditionally allocated significant capital to distressed include Baupost and King street (latter facing big redemptions).
A few other funds with very significant distressed capital but not necessarily known primarily for it include GSO, Centerbridge, and Apollo. Kkr does it too but to a much smaller extent, Carlyle even smaller.
Have any of the large guys done well in recent years? My understanding is that basically everyone has had it rough in recent times.
this is great and jives with everything I’ve heard and known as well. for the traditional multi-Strat credit funds like Brigade, Goldentree, Canyon etc. where they have HY sleeves, CLO sleeves, l/s credit hedge fund and distressed drawdown sleeves, do you have any insight into the AUM mixes for that?
My understanding from conversations with folks is that Goldentree AUM is 50% CLO and 50% fun stuff (liquid HF and traditional drawdown Distressed). Canyon I’m not sure and would be very interested to know Brigades. people speak very highly of them but it’s clear from Bloomberg articles they had a bad performance in their hedge fund vehicle from energy, so I’m wondering if it’s like only 10-20% distressed & hedge fund vs. 80% CLO/performing. King Street as well is almost CLO AUM than HF AUM I’ve heard
Not sure about specific AUM mix at those firms but this is the prevailing trend in the industry as a whole. The fact of the matter is that while performing/CLO funds may not being the sexiest thing around, they provide a much more stable source of income relative to a large, standalone credit hedge fund structure. This combined with the fact that the distressed opportunity set was incredibly small before COVID leading to a large group of players crowding into a small number of very unprofitable trades makes the case for raising these types of funds to offset that volatility all the more compelling. As a result you've seen the Anchorage and King Streets (to name a few) of the world pursue this strategy.
I think its also important to note that while at some funds the analysts may be siloed between the two strategies, other funds have one research team that works on both distressed and performing. The latter is obviously preferable.
the latter is preferable if your other option is to just be on the CLO team :P personally it’s a lot of maintenance work to do the CLO function while also doing deep dives on high octane trades you want to put into the distressed or hedge fund book. Brigade is notable for having a combined research analyst function. King Street, Anchorage and Goldentree are silo’d for sure. other smaller places are probably combined.
Yeah I agree but I'd also argue that you learn a TON about a particular industry doing work on hundreds (exaggeration) of new issue loans that eventually turn into stressed or distressed opportunities. You could make the argument that its a better type of position for someone junior/coming out of college where they don't have much experience and need to get a lot of reps in quick while also having the benefit of looking at sexier stuff on the HF side.
Brigade is def not silod but I have also heard from a friend that works at Anchorage that its one research team over there as well. They may have a small distressed/workouts group but I believe the rest of the platform is divided by industry verticals investing across the cap structure. Not sure if thats consistent with what other ppl have heard.
I feel like Anchorage definitely has a dedicated distressed team? Maybe they are a little more fluidly structured where HY analyst rides along with distressed team when their names become topical. In another vein, I thought GoldenTree was structured very similar to Brigade? Do they silo their research team? What other shops do people know of that have a single research coverage structure across all strategies?
I've always wondered that about Brigade and such structure. In theory, I think it is a great strategy. You have analysts who have visibility across their entire industry they can carry over from HY coverage, detecting early signs of distress, and ready to act quickly because you already have an informed view. What doesn't get discussed is often pure distressed analysts miss the long-term trend because they are trying to get up to speed in a hurry only AFTER the credit becomes topical. So you get this phenomenon of all the run of the mill distressed analysts all chatting about the same 10 names that traded down 2 weeks ago, "compare notes" with the same generic canned view, and crowd into the trade. Esp. with private companies (majority of loan market today) , you are working with significant informational disadvantage this way. On the other hand, a GOOD (emphasis) performing analyst will have the benefit of following the credit for 1-10 years, notes on all the issues the company has faced historically, and what they are seeing through from competitors or supply chain players in the same vertical. However, they often don't have a mechanism through which to express this likely better-informed view given the default position (no pun intended) for performing mandates is to punt the credit once it is headed to restructuring to cut the losses and move on (some exceptions to this)....
But I can also see the dual-mandate being a huge labor suck. You probably shouldn't be covering more than 30-40 credits if you want to leave time for deep-dive work on the distressed side -- which would require a huge staff/headcount at a firm size of Brigade (CLOs hold 100-200 names in each vehicle). Also, I don't know how you balance out the conflicts in a restructuring since performing fund incentives (par recovery) will often diverge from what is good for distressed fund (equitization/value transfer away from existing security).
I don't work at any of the firms mentioned, but I can confirm this point. I spend time catching performing credits of other analysts that fall into distressed situations and working them out, and I'm always struck by how little value-add the covering analyst is when it comes to deep dive questions. To their credit, they do know a lot so not knocking, but nothing I can't learn by reading the CIM / having a convo with a sell side analyst. This requires a full re-underwriting of the credit, and (while hindsight is 20/20) there are often clear indicators of potential distress that could have been flagged beforehand. If they're primarily trading new issues / on the run HY all day it is tough to find time to really dig deep on a name so it sucks to get stuck in these situations.
Anchorage like most firms have a few senior guys that will be in charge of the more high-profile restructurings. Lots of legacy 1990’s-founded firms are setup this way because senior MDs become invaluable to the firm and the firm gives them leeway to “work on what they want”; otherwise it’s usually a team loosely follows industry-experience with some sr. analysts sometimes being in charge of two somewhat unrelated industries (i.e. a Sr. Analyst covering both industrials and mortgage REITs).
I generally agree - I don't cover new issues but getting up to speed on the loans last month with only a CIM + barebones quarterlys is certainly a disadvantage compared to the guys who have been on all earnings calls over the past years, spoken to sponsor from deal launch to day of loan trading in the 60s. Anyone who tells you otherwise is just being arrogant (yet their returns continue to suck and I know that for a fact because I don’t see anyone with GOOD enough returns to back their arrogance).
What a CLO analyst lacks is (i) depth of focus on particular credit because their universe may be stretched too thin and (ii) inexperience with bankruptcy process or out of court game theory. That is where a firm with true experience in distressed can add significant value whether that be non-pro rata controlling DIPs or selective uptier exchanges combined with more interesting trades like CDS orphaning (or otherwise significant-widening credit event).
Longer-term a firm with both skills that can allocate capital between many vehicle and strategy structures are advantaged which is why all major credit players have grown into multi-strat firms that have either a dedicated research team for covering new issue credits by industry or single-research teams (it sounds like Brigade Anchorage GTree do this, not sure who else?). I think the way Canyon / King Street / Avenue does it for example will also lead to market share gain over time - i.e. there is performing loan guy integrated into the team who can immediately give you pertinent update on when a loan becomes truly distressed and you can ask him/her unlimited questions as they've covered it for years.
End of the day, asset management is a business with revenue growth and huge operating leverage on the upside (and you can cut bonuses to barebones giving it good downside once you reach a critical mass of stability/AUM). If you can get a firm like Blackstone to take a 15% ownership stake at the GP level with growing revenues from continued growth in stable mgmt / perf fees when they actually count (doesn't matter as much if you annualized 9-10% in next three years 2021-2024 if all of that was in a 8% pref drawdown fund or your renegotiated HF side letters that now require a hurdle...); that all in is the best firm to work for.
No one likes working for a company with declining topline and that doesn't preclude HFs from that statement. And that's coming from someone who works a prominent single-flagship type fund that has seen revenues come down and not sure what the future holds. I certainly hope for our fund to magically be up 50% net and 70% gross like was common in the last two recessions but it seems wishful thinking in the extreme. If you were a distressed fund focused on CCC credits in last few years and ignored all the BB and up credits, you've woefully underperformed the "stress/par guys" and that's an unfortunately truth of our industry that i grapple with everyday when thinking I've spotted the next 40c -> par recovery security our firm should buy.
On the conflict side - that is interesting. I've been in a few deals alongside firms that held portions of their "aggregate" position in both HF/CLOs and it doesn't seem to affect the decision making. I think some firms just have a "alternative-credit manager" mindset first vs. the CLO-only mindset is "oh my god, i hope the rest of the team doesn't stuff me with a rights offering or cash out option". I have yet to see the CLO-conflict come up but I'm sure at those firms it's a consideration for the CLO PM who voices his/her concern about the chapter 11 process.
Good observations all around and I agree with many aspects of your argument.
On both of your points on what a CLO analyst might lack, I added the emphasis -- a GOOD par/stressed analyst will have ability to deep dive on focus/situational credits while providing maintenance coverage on carry names. They will have previous distress experience and workout reps to know what to do and what others are looking for. We're not talking about Elliott level savvy, but generally in touch with market trends and toolboxes available to them & others. A bad analyst in CLO land comes in the form of guys that regurgitate management comments and CIMs, inability to form a conviction around key variables that actually matter, and no appreciation for price vs. value because they view the world in terms of coupon/ratings ratio. And that's OK, they have a place somewhere and are sources of price inefficiencies.
There are just as many "bad" analysts at distressed shops. This just takes a different form -- underappreciation of risk, a FOMO mindset that invariably leads them to all the headline credits that their friends talk about, overconfidence in a thesis hastily put together in 2-3 weeks, and misguided sense that they are the smartest person in the room. In other words, they don't know what they don't know -- a cardinal sin in investing as elaborated on by Buffett among many others. These guys have been getting flushed out with every liquid on-the-run distressed trade of the last 5 years and this crisis will accelerate that. Distressed as these guys practice it is NOT counter-cyclical. It is just as PRO-CYCLICAL as buying the S&P ETF (probably more so). This "strategy' boils down to long CCC beta, no matter how much they believe their alpha derives from "complexity premium", "illiquidity premium", and all that mumbo jumbo. In other words, "I did a lot of work and it's really complex" is not an investment thesis.
It's a balancing act. If you have no coverage on BB/B credits and even some equities and IG in your space, you are fishing in a rotten pond. A true HF that serves its purpose in an asset allocator's portfolio should look up and down the spectrum and capital structure to find idiosyncratic dislocation in price vs. value with a catalyst. Whether the firm is in distressed should be just another form factor that you address with restructuring skillset in-house. End game for investing, in any asset class, is to identify value in excess of price to go long and price in excess of value to go short -- this is the only way to generate high quality returns if your core skill set is fundamental analysis. There are other differentiated return sources you can tap from a different process/legal/activist skill set, but I don't know enough and frankly don't have interest. It's trouble if you and your PM are confused as to which one is the true source of your alpha. (it is likely not both...) Obviously, this takes a team of really strong all-around athletes that are comfortable deep-diving and getting to the crux quickly while keeping their radar on for dozens of names in the universe that fit in to various strategies inside of a multi-strat house (par, stress, distresss, long/short RV). I feel like shops like Diameter, Brigade, and it sounds like Anchorage too have done a good job of this. And interesting that Apollo isn't getting a lot of mentions. I get the sense that they are in this camp (different animal) on their credit side -- note their credit AUM is $200Bn. My guess is 90% of that is IG/HY and they glean a lot of insight early on from their performing book on where to make the bets for the 10% of HF/distressed books that they are known for.
i have access to most of these team's recent drawdown presentations if you have a specific question on any funds (there's been numerous articles flying across Bloomberg of who has and hasn't raised funds in last month) to give you idea of most active allocators to distressed. Though it is fair to assume every firm has reached out to its LPs to request additional capital, notably in a fresh vehicle rather than forcing them into subscribing to an existing fund that's marked down 10,15,20%+ with no liquidity / huge bid-asks to mirror the new subscription into the existing portfolio.
King Street has 4.5bn in CLOs, which would make it ~22% of its AUM
OMG. We actually have someone on WSO who knows what they are talking about!!! jokes aside yea the original list is completely out of date.
.
u forgot monarch
also Ares
Knighthead Beach point Mudrick Contrarian
Jason Mudrick is very astute investor, and came from Contrarian. Knighthead is also a great firm that came out of Redwood.
Beach Point I think of as more a high yield shop that will get sometimes stuck as term lender in distressed situations (see Cumulus).
Haha redwood was another I meant to mention but forgot when I was typing.
There are also up and comers and places that have started up in the last couple years
Axar Marble Ridge Nokota JH Lane Lion Point
You mean Jason Mudrick?
What about DE Shaw Special Situations?
L O L
damn why’d I have to get MS I’m just asking bc there’s not much info
Anyone has views on this for Europe? There seems to be many smaller distressed funds in London but what about the larger ones?
basically 90% of the them are London branches of US based hedge funds lol. I can’t think of any big London based distressed debt fund. Bybrook has $2.4bn AUM, Attestor has over $5bn....Tresidor, Aptior, Ironshield, they’re all sub $200mm I believe. everything else is so small. I must be missing something but it would be crazy if Attestor was the biggest london based distressed fund. HayFin maybe idk. I guess BlueBay and BlueCrest (pre-FO)
That makes sense, thanks. And then I guess these US funds with a London branch have Europe-dedicated funds? Who are the US funds with a large portion of AUM focused on Europe?
There also seems to be more PE houses focused on distressed debt in Europe?
I am quite new to all this so would appreciate any colour!
Good list, thanks. I would add alchemy, Warwick, cheyne, alcentra, alteri, caius for London based funds
Looking through this thread, I'm curious what everyone's thoughts are on the sustainability of the strategy. It's seeming more and more like purely distressed credit isn't a sustainable strategy to run a fund outside of opportunistically shifting to it when the environment calls for it and shifting to either event driven/value/activist equity-oriented strategies or more RV-based convert arb and SS credit strategies when the environment isn't prime for distress.
I don't think I agree with that. Distressed investing is cyclical so yes there will be very good years and very bad years of performance but LPs are aware of that when they do their asset allocation exercise and they are fine with it. Also it is essentially not possible or at least not probable that an investor can time the markets cycles so you might want to have a distressed allocation at all times to be ready.
That being said most funds do a bit more than pure distressed e.g. buy some 10% yielding bond with a margin to get to your 20% target IRR which is more of an aggressive high yield play than pure distressed which a lot of distressed debt funds do in "good times". So in a way I do agree that it might not work well to do only pure distressed debt (as you do have to deploy capital after all) but I also think that that distressed debt funds can be (and are) independent funds focused on distressed. As I understand it, it is why you hear "distressed debt and special situations" so often where special situations are those slightly different high yielding debt strategies that can happen even in "good times".
Yes, I agree with the previous comments. Distressed works best as a complimentary and non correlated strategy of a multi strategy hf or big AM, rather than a core / only strategy
All the posts above have been pretty insightful, but it seems the old "list" is a bit outdated performance wise. In terms of launching a career in distressed what would some of the best shops out of IB be? What's the consensus on starting out at a smaller shop (more responsibility) versus larger shop (more staying power and dollar influence)?
I'll just be starting out of college at a distressed shop and have worked at one of the up and coming names on the list up there but I don't really have any real experience so my words probably don't matter a lot but here's what I would do:
I would rather start out at the up and coming smaller shop I worked at vs say elliott/york/anchorage. Don't get me wrong, I'd love to work at the latter funds and would probably take an opportunity to do so in a hearbeat, but if I have the option, from my experience, I'd rather go to the former. I'd rather take on much more responsbility, get more involved in the rx/turnaround process and have more say in the investment recommendations as I start and get more involved in smaller/hairier mandates vs be just another analyst that probably won't really get involved in a rx/turnaround process until a year or so and just take a look at larger deals. Of course a fund like elliott would probably have the ability to control the process in much larger deals and you would get more exposure to more big name deals, but at the same time I would argue that you would get the same exposure but at smaller names at the smaller shops too - the smaller shops would have the ability to take control of some of the processes they get involved in if they want. You might get involved in the larger deals like at Elliott/Anchorage at the smaller shops too but probably won't have as much control over the process or maybe limited to how much control you have because of the size of the investment. Generally speaking, I think I would get a lot of exposure right from my first day at the smaller shop vs the larger shop regardless.
In terms of career growth/comp, I've seen guys from my earlier fund who have come from the big name shops like SVP/Anchorage/Elliott and quickly rise up the ranks and get more say in the investment decisions, sit on boards, etc. at the smaller shops, and I've also seen a couple of guys who have joined the fund out of IB/MBA and then leave for the likes of Anchorage/Elliott/SVP at a more senior role. I wouldn't necessarily say that starting out at one vs the other stunts your growth trajectory and that isn't something that would make my decision between small shop vs large shop particularly harder. From my exp, the guys at either of the funds tend to know someone/have some connection to guys at most of the distressed shop because it's a small world so I'm sure if you do well and have a nice relationship, someone wouldn't mind helping you to land another seat.
Idk how much this influences people's decisions, but benefits might be different at a smaller shop vs a larger shop, but you will still get the standard daily 40 or whatever dollar meal allowance/travel allowance at the smaller fund and at the larger fund, still have free meals at both shops, get good health benefits, etc. Sure, idk but maybe Elliott has its own gym for its employees or has a private jet but who cares?
The only people who probably look up to someone working at Elliott and look down at someone at say the up and coming fund are high school kids who haven't worked at a fund before or ib guys who just chase brand names. It comes down to what type of mandates/deals or teams you prefer to work on at the end. Do you want to get more involved in larger processes or do you find smaller deals more interesting? Are you ok with not always having the ability to get involved in processes because of the size of your investment or do you want the ability to be involved in larger processes? I don't think there's any consensus that you would be better off working at a larger shop vs a smaller shop. Sure, the smaller shop might blow up sooner than the larger shop but you could say the larger shop has more drawdowns because of a bad big name deal as well but this industry is about taking a risk so that's a risk you should assess for yourself as well
real helpful man. How's comp and hours lining up during these times, or at least for you, your experience in your internship?
Anyone have data on how some of the big credit funds listed on this thread have fared in 1Q20? The post above with the 3 year annualized returns is great, but was wondering if people have numbers for how these funds have done through the crisis. Seems like how funds perform through this will have big impacts going forwards.
A lot of the larger distressed funds got shit on in March ..like high single / low double digits for the year. Gonna take time for funds to profit from the crisis.
Any thoughts on Oaktree Special Sits? I haven't seen or heard much about them.
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