We’ve spent a considerable amount of space discussing what to make of the credit cycle. Our intent is to give professionals a well-rounded view of what to expect now that we’re in year 8/9 of a bull market. You can read Parts one (Members’ only), two, and three (Members’ only), respectively.
Interestingly, certain investors have become impatient and apparently thrown in the towel. Is late 2019 or early 2020 too far afield to continue pretending to deploy a distressed investing strategy? Or are LPs anxious and pulling funds from underperforming or underinvested hedge funds? Is the opportunity set too small - crap retail and specialized oil and gas - for players to be active? Are asset values too high? Are high yield bonds priced too high? All valid questions (feel free to write in and let us know what we’re missing: email@example.com).
In any event, The Wall Street Journal highlights:
A number of distressed-debt hedge funds are abandoning traditional loan-to-own strategies after years of low interest rates resulted in meager returns for investors. Some are even investing in equities.
PETITION Note: funny, last we checked an index fund doesn’t charge 2 and 20.
The WSJ continues,
BlueMountain Capital Management LLC and Arrowgrass Capital Partners LLP are some of the bigger funds that have shifted away from this niche-investing strategy. And lots of smaller funds have closed shop.
A number of smaller distressed-debt investors have closed down, including Panning Capital Management, Reef Road Capital and Hutchin Hill Capital.
PETITION Note: the WSJ failed to include TCW Group’s distressed asset fund. What? Too soon?
We should note, however, that there are several other platforms that are raising (or have raised) money for new distressed and/or special situations, e.g., GSO and Knighthead Capital Management.
Still is the WSJ-reported capitulation a leading indicator of increased distressed activity to come? Owl Creek Asset Management LP seems to think so. The WSJ writes,
Owl Creek founder Jeffrey Altman, however, believes that if funds are shutting down and moving away from classic loan-to-own strategies then a big wave of restructuring is around the corner. “If anything, value players leaving credit makes me feel more confident that the extended run-up credit markets have been enjoying may finally be ending,” Mr. Altman said.
One’s loss is another’s opportunity.
Speaking of leading indicators(?) and opportunity, clearly there are some entrepreneurial (or masochistic?) investors who are prepping for increased distressed activity. In December, The Carlyle Group ($CG), via its Carlyle Strategic Partners IV L.P. fund, announced a strategic investment in Prime Clerk LLC, a claims and noticing administrator based in New York (more on Prime Clerk below). Terms were not disclosed — though sources tell us that the terms were rich. Paul Weiss Rifkind & Wharton LLP served as legal counsel and Centerview Partners as the investment banker on the transaction.
On April 19th, Omni Management Group announced that existing management had teamed up with Marc Beillinson and affiliates of the Beilinson Advisory Group (Mark Murphy and Rick Kapko) to purchase Omni Management Group from Rust Consulting. Terms were not disclosed here either. We can’t imagine the terms here were as robust as those above given the market share differential.
The point is: some opportunistic folk sure seem to think that there’s another cycle coming. And they’re putting their money where their mouth is, thinking that there will be money to be made in the (seemingly saturated) case administration business. Time will tell.