distressed debt update - sheffield haworth...overview as an asset class, distressed debt is...
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DISTRESSED DEBT UPDATE -SPRING 2020
Chris SmailesAndy ThompsonLouis Demetro
INTRODUCTION
DISTRESSED DEBT UPDATE - SPRING 2020
DISTRESSED DEBT - CHALLENGES AND OPPORTUNITIES
Having seen a very slow year for fundraising in 2019, largely due to sub-par performance relative to private equity and a high percentage of dry powder from previous raises, it looks like 2020 will likely be a rebound year for distressed debt from both an asset flow and human capital perspective.
As investment managers readied themselves for the end of the 10 year long bull market, they have started to build up capabilities in both pure distressed debt and more diversified special situations strategies within the last 6 months. We expect these efforts to only intensify in Q2, with managers predicting the best investment opportunities this year to start arising in Q3 and Q4.
An asset class historically dominated by hedge funds, we have seen both traditional managers and diversified platforms building up capabilities in this space in recent years and growing wider special situations units (which can double as distressed debt under the right conditions).
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Location of Distressed Debt Talent
Northeast
West Coast
Mid-Atlantic/SoutheastCentral
Average Headcount ofDistressed Debt Teams
2-4 4-6 6-8 8-10 10+
Average Headcount of Distressed Debt Teams
Location of Distressed Debt Talent
Location of Distressed Debt Talent
Northeast West Coast Mid-Atlantic/ Southeast Central
FUNDRAISINGDISTRESSED DEBT
UPDATE - SPRING 2020
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As an asset class, distressed debt has had its fundraising challenges but the following trends are the most prevalent:
Channel Opportunities: Whilst most channels have allocated to distressed, it historically been the most sophisticated investors, such as family offices and endowments that have been most prevalent.
Sector Focus: When allocating to dedicated distressed debt strategies, managers have seen particular interest in funds focused on particular sectors (such as energy), rather than cross-sector funds. These strategies are more prominent within the distressed debt boutiques.
‘Go Anywhere’: Clients continue to have greater interest in ‘go anywhere’ credit opportunities or direct lending strategies, versus dedicated distressed debt allocations. These strategies are more prominent within larger managers and give them flexibility to reduce distressed allocations in bull markets.
Drawdown Structures: LPs are continuing to prefer a drawdown structure to a traditional hedge fund structure, when allocating to the asset class.
Investment Profiles: The distressed debt market continues to be divided into those which invest via ‘loan to own’ deals, focusing heavily on the private side of the market with significant pools of capital and those which predominantly invest in more liquid securities, such as distressed bonds.
Team Profiles: LPs continue to have a bias towards those smaller distressed debt teams (5-6 individuals) who sit as part of wider credit organizations, that are able to leverage dedicated industry analysts that work across the capital structure. Managers work to staff their teams with versatile generalists, but ensure that they have public markets, private markets and restructuring expertise.
Capital Raising: Debt managers have now been reopening and launching their funds to investors after identifying numerous opportunities amid the market dislocation spurred by the coronavirus. Firms such as Crescent Capital, Gramercy, Diameter Capital, Riva Ridge Capital, Christofferson, Robb & Co., and Whitebox Advisors have joined the list of firms that either are seeking fresh commitments or plan to do so.
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DISTRESSED DEBT UPDATE - SPRING 2020
COMPENSATION OVERVIEWAs an asset class, distressed debt is well-known to have varied compensation, with the following trends being the most notable.
Equity: Equity is not widely held within the boutiques in the distressed debt space, with equity being concentrated in the hands of the founders. This is a frustration for many and is an angle to encourage talent out of these institutions.
Buy-Side Distressed Debt Analyst Backgrounds
Liquid Private Banks / Advisory
Carried Interest: Carry has now been a part of compensation for senior credit investment professionals (principal and above) by the vast majority of large managers. This is less common amid the smaller firms and boutiques but is now becoming a more commonly adopted practice as they look to compete for talent.
Revenue Share: Some managers have begun allowing their senior professionals to be compensated directly on a revenue share basis, however, this is typically reserved for those who are leading groups.
DISTRESSED DEBT UPDATE - SPRING 2020
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We have seen the following notable hires within the asset class in recent years:
We have seen the following notable hiring trends:
HIRING UPDATE
INDIVIDUAL MOVING TO MOVING FROMAndre Zeitoun DFG Investment Advisors
Senior Advisor - High Yield & Distressed Debt InvestingApplied Minerals Inc.President & CEO
Matthew Rothfleisch Atalaya Capital Management Managing Director, Distressed and Illiquid Credit
Rotation Capital CEO and CIO
Robert Carroll GSO CapitalMD and Head of Distressed Trading
Smith Cove Capital ManagementHead Trader
Adam Maintin GSO CapitalDistressed Debt Trader
BlueMountain Capital Management Trader
Ethan Auberbach Black Diamond Capital ManagementPortfolio Manager, Distressed Debt
Greenlight CapitalInvestment Analyst
Dan Oneglia GSO CapitalCo-Head of Distressed Debt
Goldman Sachs Portfolio Manager – Head of Multi-Strategy Investing
Research Hiring: With the amount of distressed debt in the U.S. quadrupling in less than a week (as of 03/25/20) to nearly $1 trillion, reaching levels not seen since 20081, managers are re-building their research groups to ensure that they have full coverage. Distressed Debt teams have historically been overweight MDs, as many managers had downsized their teams due to the lack of opportunity in the asset class.
Sector Coverage: Managers are looking to expand their distressed debt investments outside of traditional underpriced bonds, towards more esoteric markets like litigation finance. This has often necessitated hiring from other channels, such as the banks.
Restructuring: As managers look to increasingly participate in a greater number of private distressed deals, funds have brought in talent from advisory firms, to further equip their teams to handle complex transactions.
1. Doherty, Katherine. “Distressed Debt Balloons to Almost $1 Trillion, Nears 2008 Peak.” Bloomberg.com, Bloomberg, 25 Mar. 2020.
DISTRESSED DEBT UPDATE - SPRING 2020
Contact UsChris SmailesManaging DirectorE: [email protected] T: +1 646 597 7403
Andy ThompsonExecutive DirectorE: [email protected] T: +1 646 597 7404
Louis DemetroSenior AssociateE: [email protected] T: +1 646 597 7436
777 Third Avenue, 36th Floor, New York, NY 10017T. +1 (212) 593 7119W. www.sheffieldhaworth.com
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