Distressed Private Equity: Deals, Firms, and Salaries

Introduction to Distressed Private Equity

• Distressed Private Equity involves investing in troubled companies during bankruptcy or restructuring to gain control, improve them, and eventually sell them or take them public.
• Similar to traditional PE but requires broader knowledge including credit, capital structure, and bankruptcy code.
• Significant overlap with hedge funds, employing diverse strategies.

Key Strategies in Distressed Private Equity

1. Distressed Debt Trading
   • Buy debt at a discount to par value and sell when price rises.
   • Involves credit default swaps.
2. Distressed Debt Non-Control
   • Buy debt to influence restructuring terms.
   • Aim to increase debt's market value.
3. Distressed Debt Control
   • Acquire controlling stakes by purchasing fulcrum security.
   • Operate and sell or take company public.
4. Turnaround
   • Acquire equity before bankruptcy.
   • Restructure and guide company out of distress.
5. Special Situations
   • Includes strategies involving spin-offs, asset sales, etc.
   • Can act as a lender of last resort.

The Evolution of a Distressed Deal

• Example: ABC Carpet, which faced distress after rapid expansion and resultant debt.
• Distressed firms analyze capital structure and market changes to strategize investment and control.
• Different scenarios and outcomes in distress strategies affect investment decisions.

Valuation and Financial Modeling

• Scenario planning is critical.
• Capital structure directly influences control strategies.
• Operational changes are often modeled extensively.
• Due diligence involves understanding counterparties.

Who Gets Into Distressed PE?

• Ideal candidates have backgrounds in restructuring, corporate law, distressed debt desks, or credit-focused finance.

Top Distressed Private Equity Firms

• Includes large firms like Oaktree, Cerberus, TPG, as well as smaller focused funds.
• Many firms specialize in specific distressed strategies.

Compensation in Distressed Private Equity

• Similar to other PE at junior levels but can be higher for senior positions depending on fund performance.
• Compensation is volatile and often influenced by carried interest.

Exit Opportunities

• Broad opportunities mostly within credit-related fields.
• Limited crossover to non-credit roles like VC or corporate finance.

Pros and Cons

• Pros: Diverse work, wide exit opportunities, varied firm sizes, counter-cyclical opportunities.
• Cons: High stress, tough entry barriers, compensation volatility, not a recession shield.

Conclusion

• Distressed PE is not a quick career fix but offers diverse challenges and opportunities.
• Suitable for those with a genuine interest in distressed investing and a broad skill set.