Opportunities Abound for Distressed Specialists
Money keeps flowing into distressed investing. Like bargain hunters, hedge funds and so-called “vulture investors” are on the hunt for opportunities in troubled situations. Hedge World reports that many hedge funds and other managers are raising new distressed investment vehicles and moving portfolio allocations into this area, according to a survey by Debtwire. Nearly 100% of those polled expect company defaults to increase.
The 2008 Distressed Investing conference - a panel comprised of some of the top private equity, hedge fund and other alternative investment investors in distressed assets convened by The Deal -agreed unanimously that the new economic environment held huge opportunities for distressed investing specialists. Amid the trend, executive recruiting firm, A.E. Feldman, says that demand exists for investment professionals who specialize in researching distressed securities and who understand the true risks and values involved.
Big Gains for Distressed Investing
In the wake of the subprime meltdown, a number of investors turned to distressed investing - a cyclical strategy that tends to do well when times are tough for everyone else. They are seeking out cheap or distressed debt, undertaking turnaround situations or rescuing companies from liquidation.
Nearly 75% of hedge funds polled by Debtwire plan to increase allocations to invest in troubled companies and raise new funds for this purpose, according to a Hedge World. Ken Meehan, Managing Editor of Debtwire says 2008 is on track to be a pretty good year for distressed strategy hedge funds. In the survey, the majority of hedge funds said their target return for 2008 exceeds the 15% to 20% range.
Hedge World quotes Mick Solimene, Managing Director at Macquarie Securities (USA) as saying that capital is flowing out of merger and acquisition strategies and into distressed and right now more than $600 billion in capital is available for investing in distressed situations. U.S. private equity firms alone have raised more than $48 billion in 2007, three times the total for 2006.
Focus on Talent
Almost $100 billion has already been set aside for restructurings, which translates into significant price competition for deals, according to Michael E. Heisley of Stony Lane Partners a Distressed Investing Conference panelist. The Deal also quotes Mark K. Holdsworth of Tennenbaum Capital Markets as saying, “Distressed debt investing used to be almost like a cottage industry; today its much more mainstream. There’s been a lot of money raised that’s sitting on the sidelines [for making] deals, but to be differentiated in this business you have to be ready to own and operate the business. One of the most important factors is going to be picking management.”
The Deal says Heisley believes “the most important ingredient is how many people you can bring to bear to turn the company around. For those companies that have to be restructured, the ingredient that’s going to be hard to get is the people - to go in there and make the hard decisions under a lot of pressure to really get the company turned around.”
