Friday, June 5, 2009

Distressed Debt Investing

On Tuesday, after learning of it from Hunter, I attended the Harvard Business Club of New York's Distressed Debt Roundtable.

Hunter has posted notes taken by one of the attendees on his blog.

The notes seem relatively accurate, but I thought I'd point out, what I believe, were the chief takeaways from the Roundtable:

  1. There are a lot of opportunities to make money after a fairly long drought in the distressed space;

  2. As in typical value investing (consistent with Graham & Dodd), the key to making better returns is to identify inefficiencies in the market;

  3. There are many more players, and more cash, looking to participate in the distressed market, making it harder to find good opportunities (not impossible, harder);

  4. Europe is one place where there are opportunities. There really hasn't been much of a distressed investing market in Europe until now, and there was a great deal of leverage employed there;

  5. The bankruptcy laws of the UK, Germany and the Netherlands are attractive to distressed investing;

  6. The laws of France, Spain, and Italy are less creditor friendly and, therefore, not very attractive for distressed investing;

  7. In the US there ARE opportunities. They require a lot of work - sometimes to find a situation where there is no point of entry (the debt has increased in price or isn't available to purchase) - so you HAVE to, in effect, be willing to drill a lot of dry holes to find a gusher (to use an oil industry analogy);

  8. Distressed debt investing requires similar skills to private equity, but a completely different mindset. One of the panelist mentioned a situation where a PE professional was having difficulty wrapping his mind around projecting a deteriorating situation (they are used to projecting growth in revenues and/or margins - declining margins are antithetical to typical PE investing);

  9. It definitely helps to bring new money to a distressed situation;

  10. The most attractive opportunities are good companies that have bad balance sheets;

  11. Sometimes the current management may not be able to get the most return from the business and a management change is required. Being able to identify THESE situations will generally provide the greatest inefficiencies (and, therefore, risk/reward ratio); and

  12. Distressed investing is part of the overall market place. If the economy gets worse, then their investments may lead to significant losses (this is not a riskless business).

I thank HBSCNY for putting this roundtable together and White & Case for hosting it.

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