Distressed Debt Specialists See “Bonanza Year” in 2009
John Paulson, who runs the $36 billion hedge fund firm Paulson & Co., is looking to buy distressed mortgages and distressed debt, despite being bearish on the overall economy, according to Reuters citing a Bloomberg data. The report states that Paulson wrote in a 2009 outlook to investors that he is interested in investing in debt restructurings, bankruptcies, strategic mergers and financial recoveries.
Right now, replacing traditional lenders are vulture investors which are buying distressed debt with the goal of becoming equity owners on the cheap. “Vulture investors” or “distressed funds” are growing in number. These investors aim to snap up teetering assets such as real estate and mortgage-backed securities on the cheap, then cash in when prices recover. Amid the trend, executive search firm, A.E. Feldman, says that opportunities may grow for investment professionals who specialize in researching distressed securities and who understand the true risks and values involved. The firm says candidates with strong valuation, modeling, and analytical skills are poised to gain from this trend. The firm also notes that legal jobs are opening up as law firms staff up subprime teams in an attempt to address the needs of clients facing a liquidity crisis or those searching for value opportunities.
Industry sources say private equity and distressed debt specialists have raised about $26 billion since the beginning of October 2008, with some 80% coming from hedge funds, according to Telegraph.co. The report adds that distressed debt funds have been around for years… but specialists are looking forward to a bonanza year in 2009.
Distressed investing is also known as vulture investing – though there is at least one distinction, notes Financial-Planning.com. Investors in distressed assets are hopeful for turnaround, whereas vulture investors are banking on failure… and breakup value. Distressed investors look to buy the discounted bonds, loans or other debt of firms that have defaulted as well as those that are on the verge of bankruptcy or financial restructuring. These investors are making a bet they can ride out the slide and enjoy strong returns after a turnaround. Those eyeing distressed assets include wealthy individuals, pension funds, hedge funds, endowments. A number of firms are also launching distressed debt funds.
Among the biggest distressed debt fund raisings since October have been Oaktree, which has secured $10.5 billion, Towerbrook with $2.75 billion, Intermediate Capital with $1.5 billion, and Alchemy with $1 billion, says Telegraph. The report also notes that hedge funds are aiming to buy distressed debt directly from banks that are under pressure to offload liabilities to shore up their balance sheets.
If current conditions continue and financing remains limited, mergers and acquisitions activity in 2009 will be on the light side and the deal landscape will be dominated by distressed investments across sectors including financial services, automotive, consumer products and retail, according to HedgeWeek, citing PricewaterhouseCoopers (PwC) research.
The report quotes Robert Filek, Partner in PricewaterhouseCoopers’ Transaction Services group, as saying, “Troubled companies will look to align with larger, stronger players in order to survive, creating the perfect storm for mergers of necessity.” HedgeWeek also quotes Greg Peterson, Partner in PricewaterhouseCoopers’ Transaction Services Group, as saying, “Historically, it has been during a downturn when strategic buyers and private equity firms have their best buying opportunities, yielding the best returns. The key will be the availability of financing.”
PwC says the latest available U.S. bankruptcy data is evidence of growing opportunities in buying troubled assets, notes HedgeWeek.
The 292,291 total U.S. bankruptcies filed during the third quarter of 2008 represented a 34% increase over the 218,909 cases filed over the same period in 2007, according to the American Bankruptcy Institute (ABI), citing data released by the Administrative Office of the U.S. Courts. Total filings for the first nine months of 2008 were up 35% to 841,496, compared to the 622,999 filings during the same period in 2007.
Additionally, ABI reports that business filings represented the sharpest increase during the third quarter of last year, with 11,504 filings – a 61% spike over the 7,167 business filings in 2007. Chapter 11 business filings also surged to 2,485 during the third quarter of 2008 - increase of 76% over the 1,410 filings during the similar period in 2007.
Private equity firms are actively raising distressed funds to invest in these assets, reports HedgeWeek. The report states that distressed funds have raised a total of $36.8 billion in the first half of 2008… a sign of more activity to come, citing research from Private Equity Intelligence.
Are you working in private equity or an advisor with experience in distressed investing? If you want to grow your career or your company’s bottom line, contact A.E. Feldman’s President, Mitch Feldman today!
