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- Top distress investors include Avenue Capital founder Marc Lasry and Aurelius Capital founder Mark Brodsky, as well as power players from Blackstone’s GSO unit and Elliott Management.
- Distress investing, a subsection of alternative investing that takes advantage of bankruptcies and other high-risk situations, struggled to find opportunities for years.
- The pandemic caused by the novel coronavirus has put these investors back in the spotlight.
- UBS recently projected that more than $1 trillion in corporate debt may become distressed.
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Billionaire Marc Lasry, the founder of Avenue Capital and a longtime player in the distressed-investing space, didn’t shy away from the question.
At a New York Alternative Investment Roundtable event in early February, when the novel coronavirus that has since sent markets plummeting was still mostly confined to Asia, Lasry said that distress investing might not need a recession to pick back up, but it definitely wouldn’t hurt.
“We need to have problems, because the more problems there are, the better it is,” said Lasry, who co-owns the NBA’s Milwaukee Bucks.
In good times for the markets, “we can make 10-15%” in a year, he said. But in recessions, “we can make 15-20%.”
Investors in distressed securities hope to profit by buying up debt or equity in companies in a tailspin that have some compelling reason indicating there will eventually be upside, whether that’s due to a well-known brand, an important patent, an innovative CEO, or favorable outcomes in restructurings.
Lasry described the approach as buying something that normally costs a dollar for a fraction of that.
For years, distressed investors have struggled to find opportunities as the combination of low interest rates and soaring markets limited options. Now, the novel coronavirus pandemic is sending the world hurtling toward a recession.
These investors are among a cadre of professionals who are seeing huge opportunities as companies grapple with a sudden and unexpected hit to revenue. Restructuring attorneys and bankers are meanwhile working around the clock to field calls from clients to navigate the economic fallout from the pandemic.
UBS recently projected that more than $1 trillion in corporate debt may become distressed, and blue-chip companies like airlines, cruiseliners, and restaurant conglomerates may be in need of a bailout.
Industry sources pointed Business Insider to the top players and under-the-radar stars in the distressed investing space as it comes into the spotlight again.
Marc Lasry, founder of Avenue Capital
At the New York Alternatives Roundtable event earlier this year, billionaire Avenue Capital founder Marc Lasry said he thought he’d be a physics professor, but eventually decided to go to law school, and clerked for a bankruptcy judge after graduating. There, he learned the intricacies of bankruptcy law, became interested in finance and investing, especially in distressed situations, and the rest was history.
Distress investing is about having the right blend of confidence and humility, he said.
“Psychologically, most people don’t like to buy things unless there’s no issues with it,” he said. “That’s the reason there’s an opportunity in this market.”
A good distress investor is “someone who’s not worried about making a decision.”
“Whenever you buy something, everyone is telling you not to buy it,” he said.
John Zito, Apollo Global Management
John Zito is on the up at Apollo Global Management and he’s been behind some of its most significant distressed-debt investments.
Promoted to deputy chief investment officer last year, he is the co-head of global corporate credit and is based out of New York City.
Just last year, he was behind Apollo’s portion of a $4.2 billion loan agreement with PetSmart, as well as the firm’s stake in Clearway Energy, a renewable energy producer whose shares were hit after one of its customers filed for bankruptcy, according to a report in Reuters.
Zito joined Apollo in 2012 after five years as a managing director and portfolio manager at Brencourt Advisors, a multi-strategy hedge fund, where he oversaw all of the firm’s credit investments, including the Brencourt Credit Opportunities Fund, according to his biography.
Bruce Karsh, Oaktree Capital
“There’s one Bruce in music and one Bruce in distressed,” Ken Moelis, CEO of Moelis & Co. once said of Bruce Karsh, the co-founder of Oaktree Capital.
It was 11 years ago that Karsh and his investment partner Howard Marks made a fortune by buying billions in debt of struggling companies throughout the global financial crisis.
Today, their Oaktree Capital, now owned by asset management giant Brookfield, are looking for a repeat.
Karsh is a senior member of the distressed-debt business and a veteran of 2008, when he and his team spent more than $6 billion on distressed loans of companies like Clear Channel Communications, Freescale Semiconductor, and Univision.
“Either this is the greatest buying opportunity of my career or the world is going to end,” Karsh then told his staff, according to an account in The New York Times. “And if it ends, our clients will have much bigger problems on their hands.”
Lately, he has been seen engaging in philanthropy: in 2018, he gifted the University of Virginia School of Law $43.9 million for student scholarships and the founding of the nonpartisan legal institute, Karsh Center for Law and Democracy. And he just donated to benefit golf caddies who were put out-of-work as a result of coronavirus.
Now, though, as things start getting busy in the distressed debt arena, you’ll bet the more junior investors at Oaktree will be leaning on his advice.
Jeff Aronson, Centerbridge Partners
In 2012 and 2013, Jeff Aronson returned more than $1 billion to investors in its Credit Partners hedge fund because Aronson and his team didn’t see enough distressed opportunities to deploy their capital.
“It is not our money,” he told Institutional Investor at the time, of what the publication called a rare move. “If we can’t find compelling investment ideas, the right thing to do is to give the money back to investors.”
In late February this year, he said the market hadn’t changed much, while catching up with Business Insider at SuperReturn, the big private-equity confab, noting how it had only gone up and up and up for 11 years.
Nowadays, things are looking a bit different, and his Centerbridge Partners is one of the top firms that made a name for itself during the last downturn: investing $750 million in car parts maker Dana Corporation as it struggled to emerge from bankruptcy protection.
Jason Mudrick, founder of Mudrick Capital
In an interview with Bloomberg at the end of last year, Mudrick Capital founder Jason Mudrick said there was a lot of Triple-B rated debt that should probably be considered junk, and noted that half of the investable universe of debt was rated Triple-B.
“In a recession, typically, 10 to 20% of Triple-B gets downgraded.”
With a recession becoming more of a reality everyday, Mudrick is likely to see plenty of new opportunities — but he was still finding them even when the market was churning relentlessly up.
“Today, there’s a lot to do even though the economy is still growing,” he said. “If we do get a slowing of growth, the size of the market [for distress] could be gigantic.”
He said his firm put 10 new positions on in 2019, and in comments to Bloomberg earlier in April, relayed that he plans to put on up to 10 new positions in the coming weeks.
“We went from a benign distressed environment to the deepest and largest distressed opportunity in the history of the world,” he said.
His Mudrick Distressed Opportunity fund, which has more than $2 billion in assets, has put up big returns despite the limited opportunities, with double-digit returns in three of the last four years.
Mark Brodsky, founder of Aurelius Capital
The secretive founder of Aurelius Capital, Mark Brodsky, has gone all the way to the US Supreme Court to squeeze more money out for his investors.
Brodsky, who is rarely photographed and once had a picture of real-estate titan Sam Zell claiming to be him in one publication, reportedly views Elliott Management founder Paul Singer as a mentor, and it shows in Brodsky’s most well-known campaign against Puerto Rico’s debt bailout package.
Brodsky, like Singer, is a former lawyer, and took his fight on Puerto Rico’s debt all the way to the Supreme Court by invoking different articles of the US Constitution.
He hired Theodore Olson, the former solicitor general of the United States who won George W. Bush in presidency, to work for him, but many legal experts predict he will still not prevail in the country’s highest court.
Anthony Yoseloff, Avram Friedman, and Conor Bastable, portfolio managers of Davidson Kempner’s $2 billion Distressed Opportunity fund
Davidson Kempner’s $2 billion distressed opportunity fund is run by three portfolio managers — Anthony Yoseloff, Avram Friedman, and Conor Bastable.
The fund, as described in a presentation given to the Employees’ Retirement System of the State of Rhode Island, splits its investable areas into four broad categories: corporate investments, like the debt of a bankrupt company; real estate, which could include loans or buildings; asset-backed or structured products, like mortgage-backed securities; and hard assets, such as shipping vessels or oil rigs.
In 2017, the firm said in the presentation that “hundreds of billions of dollars in distressed assets globally [will need] to be restructured, sold or liquidated over at least the next five years.”
Like Mudrick, the firm singled out high-yield debt in the US as a potential gold mine for distress investors, especially if the market turned.
The distress team at Davidson Kempner, as of 2017, was sizable, according to the presentation, with dozens of people specializing in different areas across offices in New York, London, and Hong Kong.
The firm declined to comment on the current status of the team.
Dan Oneglia, Blackstone GSO
Blackstone tapped the senior ranks of Goldman Sachs last year to bring on the distressed debt whiz, Dan Oneglia.
Oneglia is now senior managing director and co-head of distressed investing at Blackstone GSO.
He’ll be scouting out opportunities alongside fellow co-head David Posnick — a veteran debt investor who began his finance career in the investment banking division of Drexel Burnham Lambert.
Oneglia previously spent 20 years at Goldman Sachs, most recently as a portfolio manager and head of multi-strategy investing in the Americas special situations group.
During his time there, he invested across asset classes with a focus on the oil and gas, power, healthcare, retail and consumer sectors.
“This requires sorting through financial statements; researching and understanding the facts of the business—what they do, how they do it, what their competitive advantages are, and other tangibles,” he once wrote in an alumni note to his old school, Washington Montessori School.
“It also always requires self-initiation, creativity, imagination as well as significant nuance, assumption, and art—especially in projecting how future unknowns, potential risks, and economic, social and commercial change will impact cash flows, valuations and business models.”