The future of special situations / distressed?
Accepted an SA offer at a brand name special situations HF last spring. They invest opportunistically all across the capital structure, and do both equity and credit. I hope to go back full time.
At the time, I chose special sits because I found it more intellectually stimulating, thought I was a better personality fit with the industry and my team, and just was more interested in the type of work compared to banking/PE and other types of HFs. I also thought that exposure to this style of investing would help me grow and develop into the best investor possible. However, looking at the returns funds like mine have posted over the past few years, I’m worried about longevity and viability of this industry. Many funds are struggling and low DD returns are considered phenomenal for the asset class by allocators right now. I’m expecting this to change over the next 5 years as we enter a new economic environment but I’m still worried about LT prospects.
Keeping this in mind, I was curious about a couple of things. For one, if a junior has a distressed/special sits HF background, how possible is it to career switch as an associate/VP into other investing roles, whether private markets special sits / distressed or other HFs, especially considering that I will get significant exposure to equities in my current role. I feel like I would automatically be ahead in development compared to most IB analysts since I would have 2 years of actual investing experience at a brand name after an analyst stint, but I may wrong. My thinking is that special sits experience may be transferable to a private special sits strategy and public markets / equities investing experience may be transferable to different HF strategies, but again I may be wrong. On the mention of banking, my second question is whether folks on here would recommend re-recruiting for PJT/EVR RX full time (which I believe is very possible in my situation), as that would give me a brand name of a bank on my resume as well as the greater optionality of banking, as RX analysts tend to exit into pretty much anything.
I really appreciate any insight you guys have. Really I’m just looking for any info that can be provided about the future of the special sits industry, so please feel free to steer the conversation in any direction you want, discuss specific funds, etc.
WSO really needs to impose word limits starting now.
bump, similar situation
Just a college student as well, so grain of salt. Through reading, discussion with people in the industry, and internships, I would probably say less liquidity and opportunity is an issue
1. Private credit is growing and decreasing opportunities in liquid leveraged loans
2. Less forced selling, traditionally passive sellers are more aggressive (see: Eaton Vance in Serta or PIMCO lately)
So ideally, imo, your fund has the capacity to both source and execute special situations private plays alongside doing liquid distressed restructurings / drawdown investing. That said, distressed as a % of the leveraged loan market will likely grow without the easy money policies of the past decade, but unsure whether the real absolute market value of the investable distressed universe will increase over the next 10+ years in a way that will bring back more consistent higher teen returns.
Having been on the other side of the table for a few years, my thoughts are that distressed strategies as an asset class for LPs will continue to grow both as a function of just how big the levered credit market has become and how, as the other poster noted, the potential opportunity set in the near term is seemingly very large if rates remain elevated. That being said I still think the old traditional distressed HF model is probably not going to come back with any permanence outside of certain outperformers like Mudrick and maybe ones that launch opportunistically in the right time such as next year (but would still be skeptical of these funds being able to meaningfully grow AUM past a certain point).
All weather distressed still doesn't seem like a scalable strategy and there still is a huge advantage in having large scale in credit/distressed vs being a $2-5bn single fund manager in terms of being able to drive processes / participate in some of the more economically beneficial deals. Imo the next 12 months or so will see significant LME activity particularly from sponsors like Clearlake who seem to have tons of topical names in the sector just given the multiples they paid for some of these businesses. But it does seem like for the first time in over a decade (excluding COVID) there is the prospect of actual good or at least decent businesses becoming distressed as many of these LBOs with huge floating rate exposure will likely see a lot of FCF erosion due to interest expense almost doubling from when base rates were at 0 (or 1% if you're looking at the floor in many of the loans) with a potential drop in top line on the horizon.
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Can you expand on the reasons why the larger firms will be more advantaged over the smaller SM? Also what are examples of each?
Dude are you for real? This is literally the best times for distressed firms right now
Every single bond out there trades in the 80s
In the UK after the massive screw up by the now defunct government who lasted 44 days, pension funds had to dump all their liquid assets and distressed / credit hedge funds filled their boots
On top of that, the more aggressive hedge funds are becoming active in restructuring situations to buy out the companies for whom they own the bonds rather than get crammed
Energy crisis in Europe is not going anywhere so long as the situation with Ukraine does not improve (which my crystal ball tells me “not anytime soon”), rates just went up 4-5% in the UK so the average household is going to be squeezed and all these overly levered consumer exposed businesses will become stressed
Next x years are going to be the best time for credit distressed
Also, you should definitely look to hire if you’re interested for restructuring advisory as literally every firm is going to be looking for people
personally don't see special sits/distressed going anywhere especially given the demand for alpha-generating strategies with little correlation to other mainstream asset classes. Both long-only AM firms like PIMCO and Wellington Management and MFPE like KKR, Blackstone are growing their private special situation and alternative divisions like crazy.
By any chance could you PM me? I am very interested in SS/Distress and was wondering if you could dive in on how you got ur opportunity.
Same here!
OP here, pm me.
OP here, pm me.
bump
Thought on drawdown vs HF vehicles in this strategy:
One of the worst parts of the drawdown experience is being at the bottom of the PE-like deal team structure. Pretty painful / banking like, especially at some of the MF's mentioned above (MF special sits arms are generally grindier than their buyout sister groups)
Is there some arb to be captured by "coming up" at a leaner hedge fund and moving to a more stable, drawdown vehicle type setup later, as a VP / principal / partner? A lot of these groups have VPs / principals / partners that came from distressed / event-driven hedge funds. Some did IB / PE before, but not all.
Yes this has been a common strategy for HF guys moving in at more senior levels, although I don't know if it was thought through that way. HF seats are more interesting at junior/mid levels because you get to take risk earlier on and really own the position. And then guys get sick of blowing up and volatile comp once they have kids, so sometimes look for those drawdown seats as compromise and also get talked into the gold mine at the end of the rainbow (read: carry)
Can you elaborate on the drawdown experience as a junior. From my understanding, the MF drawdown groups are more private markets special sits groups rather than public investing, so the comparison is quite stretched. Is there optionality towards PE in those special sits arms?
From the way I see it, almost all of these vehicles are private/public crossover funds. MF special sits arms primarily target private market structured investments in search of MOIC, and opportunistically look at public markets during times of dislocation. Special situation hedge funds primarily target public credit and look at private markets when there's not much to do in public markets. Some generalizations here though
Mind sharing comp progression in a special sits shop? Think Apollo, Varde, Oaktree, Magnetar, etc.
I am currently a senior analyst at a reputable rx shop considering alternatives for my career.
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