Distressed credit - public vs private?
Hey all - how did you think about public vs private credit especially as it relates to distressed opportunity?
I’m currently at a shop that invests across the capital structure and strategies (LBO to distressed) but want to move to a purely distressed credit firm. One of the things I’m hung up on is whether to pursue distressed through public or private means. I guess private distressed is more special sits / capital solutions as that doesn’t really exist.
looking forward to your thoughts
Based on the most helpful WSO content, the decision between public vs. private credit in distressed opportunities involves several key considerations:
Control and Influence: In private distressed credit, investors often have more control over the restructuring process and the strategic direction of the company. This is because private deals typically involve direct negotiations with the company or its stakeholders. In contrast, public distressed credit usually involves purchasing bonds or bank debt on the open market, where the investor has less control over the company's operations.
Information Access: Private credit deals often provide access to more detailed and proprietary information about the company's financial health and operational strategies. This can be a significant advantage in making informed investment decisions. Public credit, being more transparent and regulated, might offer less informational depth, particularly in real-time or sensitive scenarios.
Regulatory and Compliance Requirements: Public markets are generally subject to more stringent regulatory requirements, which can affect the speed and flexibility of distressed investing. Private markets might offer more flexibility but come with their own set of due diligence and legal complexities.
Market Dynamics and Liquidity: Public distressed credit can offer greater liquidity, allowing for quicker entry and exit strategies. However, this can also mean greater volatility and market-driven pricing. Private credit is typically less liquid, which might result in longer holding periods but potentially higher returns due to the illiquidity premium.
Risk and Return Profiles: The risk-return profile can differ significantly. Private distressed opportunities might offer higher potential returns, given the higher risk and longer involvement required to turn around the company. Public distressed credit might be seen as less risky compared to private, due to the liquidity and the diversity of instruments available (e.g., senior vs. subordinated debt).
Deciding between public and private distressed credit paths depends on your risk tolerance, desired level of involvement in the restructuring process, and your career objectives in terms of the types of environments and challenges you want to navigate. If you're leaning towards deep, hands-on turnaround situations, private distressed credit might be more suitable. On the other hand, if you prefer dealing with market-driven strategies and faster-paced environments, public distressed credit could be the way to go.
Sources: Distressed vs. Credit vs. Special Situation vs. Turnaround PE, Distressed vs. Credit vs. Special Situation vs. Turnaround PE
Bump
Public distressed is definitely sexier/more-interesting in my opinion. However, public distressed as we know it is a dying industry for a myriad of reasons. From a career perspective, you want to pursue special sits / capital solutions, which is growing rapidly fueled by private credit shitters like you. Public distressed seats are shrinking and returns have been shit over past two decades.
agreed— finding a seat where you can do public distressed opportunistically and stressed l/s is the sweet spot imo, but there’s very few seats like that anymore
In my view, most public distressed seats are transitioning to what you're describing so not as rare as you may think. I still think it's a shit sector to be in. Whether they admit it or not, those opportunistic public stressed / distressed cross cap stack seats always end up having a return they are solving for and most of those funds have not had great returns compared to their benchmark.
no you’re absolutely right, i think that it’s going to be very hard to get exceptional returns moving into more stressed/performing while doing the same level/type of underwriting as pure distressed; you definitely have to have more of a trading mindset or else you’re going to get run over by real money. I would caveat that there’s not many seats out there where the fund is actually doing well / the lead PM has that “everything credit and more” lineage
Definitely agree. I think your point on the trading mindset is very underrated. Stressed/performing is a lot different from distressed for control/influence and quite frankly I feel many of the shops that grew up in the latter category have archaic, inefficient processes when it comes to trading.
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