According to a survey of 150 private equity Managers across North America, EMEA and Asia conducted by Intertrust, 90% of respondents believe that there will be an increase of distressed fund transactions in the next 12 months. The survey was conducted in the midst of Covid 19 to understand the pandemic impact on the whole industry. Therefore, we will talk about distressed private equity here and how to get into this career path?
1. What is Distressed Private Equity?
Distressed private equity invests in a distressed company’s debt or equity, then sells or takes them to the public market to earn higher return. In a nutshell, Distressed private equity is a hybrid model between the traditional leveraged buy-out model (a.k.a Private Equity) and distressed debt trading (a.k.a Hedge Fund).
The survey from Intertrust shows a common market trend: distressed private equity will rise whenever a crisis, a recession, pandemic or war happen. Actually, private equity firms have been ready for an economic downturn by building up funds over the last several years, according to Pitchbook.
Distressed funds are not excluded in this trend. Those funds’ dry powder hit a record $77Bil globally in 2019, according to Preqin.
Note: dry powder is cash reserved by firms for investment purposes.
Although Distressed Private Equity will get more spotlight during recession, this strategy is normally active in PE firms as there are always some distressed companies that the funds can buy to turn them around.
1.1 Distressed Private Equity vs traditional Private Equity
Similar to a traditional Private Equity firm, Distressed Private Equity also sources deals, raises funds, manages the portfolio and finds exit options.
Another common point is how those firms work. The firms’ General partners raise capital from Limited partners, then invest in certain companies to earn returns.
The difference between two firm types are caused by the “hedge fund” element in Distressed private equity, which is reflected in investing strategies of Distressed private equity firms we will mention here:
1.2 The 5 key distressed strategies
- Distressed debt trading, in brief, is short-term trading a troubling company’s debt. This strategy is more similar to a hedge fund’s one, in which the firm will EITHER buy debt at a discount to par value and expect to sell at a higher price OR bet against the debt with credit default swap (CDS).
- Distressed debt Non-control: in this strategy, firms also invest in debt to gain more power during transformation or bankruptcy processes of troubled companies. The return of this strategy is the difference between the selling price and the buying price of that debt.
- Distressed debt Control (or Loan-to-own strategy): the ultimate goal of buying debt is to convert into controlling stake of troubled companies post-restructuring. By then, PE firms will take control, manage and operate that company.
- Turnaround: this strategy is common among private equity firms, in which firms buy Equity, restructure the whole company, and turn it into a profitable business. Because most distressed companies cannot take any more debt, PE firms will not involve leverage in turnaround deals.
- Mixed strategies: distressed PE firms can combine two or even more strategies in a deal. For example: a firm can buy debt of a distressed company first, then decide to use distressed debt control strategy to gain controlling stake, and finally involve in managing and operating that troubled company.
1.3 Top global Distressed Private Equity firms
2. Salary, Bonus and How to Get into Distressed Private Equity?
2.1 Which skills Distressed Private Equity look for?
As observed in 5 types of strategies, distressed investors can be simply short-term debt traders, but can also choose debt-to-equity exchange, or distressed-to-control. That is why distressed investors need a broader skill set: from bankruptcy specific skills , understanding business plans, to comprehension of the LBO modeling.
For example: Bankruptcy under Chapter 7 is different from that under Chapter 11. Chapter 7 is for companies that want to liquidate their assets to repay their debts while Chapter 11 will give companies some time to restructure their organizations’ debts, assets and business affairs. Chapter 11 is normally the most expensive and time-consuming bankruptcy case. Therefore, Distressed Private Equity needs people who have skills and experience in bankruptcy as they know what to do next in each scenario.
However, candidates also look at other skills, including those that traditional private equity requires, such as cash flow analysis, valuation, forecasting and business plan analysis. We wrote several articles about traditional Private Equity, in which you can find those information.
2.2 Typical backgrounds to get into Distressed Private Equity
It is very rare for a fresh graduate or an MBA candidate who doesn’t have any background to get into Distressed Private Equity as the work is more complicated than that in traditional private equity.
Some common background to get into Distressed Private Equity:
- Restructuring Investment Banking: it is the most popular track in Distressed Private Equity: 2-3 years as an Analyst in Restructuring IB, and then apply for Associate position in Distressed Private Equity.
- Management Consulting, focusing on restructuring and turnaround: this track is popular among firms that use turnaround strategy as they need a person with strong experience with troubled companies.
- Traditional Private Equity: it is possible to move to distressed private equity from this background but this path is not as common as the other two
- Big 4 restructuring group: people with this background are equipped with necessary skill sets. However, the normal concern is working culture. Work life balance is much better in Big 4 while things are hectic in private equity.
- Corporate and Bankruptcy Law: distressed investing involves quite a lot of regulations in the term sheet, which gives lawyers certain advantages in the process.
2.3 Career path, salary and bonus
Distressed Private Equity Career path is not too different from that of traditional Private Equity. There are 5 main levels: Analyst, Associate, Senior Associate, Principals and Partners. Salary in each level is also equivalent to the traditional firm.
Carried interest is another source of income but a big part of it will belong to Partners, a person who has stayed in the firm for 10 -15 years. Furthermore, Distressed Private Equity returns are pretty risky, depending on the economic climate and how efficiently portfolio companies operate.
Although having the same salary base, work life balance in Distressed funds is worse than in traditional PE as most requests are urgent and ask for the firm’s prompt actions.
2.4 Prepare for Distressed Private Equity recruitment
Distressed Private Equity does not often have many staff and that is why it is harder to break-in a distressed private equity fund. There is no such standard recruitment timeline in distressed investing; hence, if you desire to get a job here, networking is the key to understand what is going on inside those firms.
Private Equity is all about deals; therefore, before writing your resume, you should carefully consider which experience makes your resume deal-oriented. In the below table, we score all the relevant experiences so that you can have a direction for your resume.
|5||An analyst/associate at a Distressed Investment Bank|
|4||An consultant from Management Consulting firms, focusing on restructuring and turnaround|
|3||An analyst/pre-MBA associate at a traditional Private Equity firm|
|2||An experienced candidate at Big4 restructuring groups|
|1||An experienced candidate with Corporate and Bankruptcy Law background|
Note: as Distressed Private Equity firms limit their recruitments, we focus on pre-MBA Associate and post MBA Associate positions in this article.
If you can score 4 or 5, it means that you have a preferred experience for Distressed Private Equity. But what if you only get 1-3? Definitely, there will be more work to do with your resume but we will share how to twist that.
Take a look at the current job description of Associate/Senior Associate and pick the keyword when your target firm describes that position.
Example 1: Both job description and actual work of pre-MBA Associate and post-MBA Associate are related to Investment Deal. Therefore, the key theme of the resume should be your Achievements/Involvement in Deal transactions, emphasizing on Due diligence, Financial Modeling or Market Valuation.
Example 2: If the job description mentions Restructuring or Turnaround, you should mention your experience in managing portfolio companies, especially distressed ones, how to restructure to turn organizations to profitable business, etc.
Select your achievements/involvements that you can layout in your resume.
There are some ground rules that you should follow here
- You should choose 2-4 achievements under each position. Do not put only 1 achievement as it will raise the concern that you did not achieve much. There is one exception here: IB Analysts who have just started their jobs in the last 2-3 months.
- Change any relevant word into “deal”, if possible. People who scored 1-3 in the table above often slip this rule but this principal can help them have a more PE-driven resume.
- In each achievement, remember to put the size of that deal, type of that deal, and your action/involvement.
- The order of deal size, deal type and your involvement should be consistent across bullet points. We often recommend this order [Your action/responsibility][Deal size][Dealtype]. Consistency will help the hiring team catch up all the information quickly.
- Start your point with an action verb to get the attention and clearly express what you did
Those rules will be beneficial also for anyone who owns a strongly related experience in Distressed Private Equity.
The common misconception is that the interview of Distressed private equity is not the same as traditional PE. Actually, they still ask common questions. However, please equip yourself bankruptcy law, or credit related questions
The interview process will include multiple rounds.
First interview round is to screen the candidate profile by asking some fit/behavioural questions, such as Why PE? Why Distressed funds but not traditional funds? Why this firm? etc.
Other interview rounds will be conducted in-person and will skew towards technical questions, case study, deal experience, etc
What do recruiters evaluate?
Private Equity firms will evaluate your skills, your technical knowledge, and why you are interested in PE and investment deals. Many questions are designed to test these competences. Simply put, interview questions will be belong to 6 main categories:
(1) Why Distressed Private Equity associates?
(2) Why do you choose this firm?
(3) Are you comfortable with financial modeling?
(4) How do you work in a team?
Growth/profitability driver models (3)
Quick IRR math questions (4)
(1) Evaluate the growth of a deal
(2) Will you invest in the deal? If not, why?
What is the firm’s current portfolio? (1)
Tell me about the firm’s previous strategies and exits (2)
What do you know about the firm’s investment thesis? (3)
Which companies do you think are the best and the worst (4) in the portfolio? If you had been able to do something different, what would have you done?
(1) What are the major companies in this industry?
(2) Which top company will you invest in?
(3) What are the company’s growth drivers and risk factors?
(4) What is that company’s outlook in five/ten years?
Solve cases involved in 3-statement models with a focus (1) on the revenue and expense drivers
A take-home LBO model and presentation (2)
A three-hour LBO modeling test (3)
A simple paper LBO (4)
How to prepare and ace an interview
#1. For fit/behavior questions, this is the part where you tell your stories with interviewers. Thanks to these questions, recruiters will learn how your previous academic and work experience fits into the private equity and also strategies of the firm you apply for.
The questions in the first place always surround:
- Introduce a little bit about yourself / Walk me through your resume
- Some of your strengths, weaknesses
- Your achievements and failures
- Future plan and why Private Equity?
What you should prepare here are crafting your own stories (reflecting your achievements, past experience, transferable skills and leaderships), and backing up small personal stories to answer questions related to strengths and weaknesses.
If you have some disadvantages in your profile such as low GPA, non-target background, fewer outstanding accomplishments, fewer finance internships, and etc., you have to prepare stronger responses to make up for these “real weaknesses”.
#2. For technical questions, what you will be interviewed always sticks with accounting, finance, valuations, and practical deals.
- Accounting: Financial statements (types of financial statements, links between different types of financial statements), revenues, operating costs, EBITDA, debt & equity, etc.
- Finance: Equity Investments (stocks), Fixed Income Investments (government bonds, corporate bonds, commodities, currencies) , Derivative Investments (options, futures, forwards, swap), etc.
- Valuation: Valuation metrics and multiples, (Discounted Cash Flow, LBO modelling, etc.), knowledge about mergers and acquisitions, etc.
#3. Other non- technical questions: Beyond technical comprehension, private equity firms also want to test your knowledge about the market, practical deals and companies. Your work is to keep abreast of news about markets, imminent IPO, bond issuances, and mergers & acquisitions on a daily basis. They can also ask your opinion about the firm’s portfolio and what you will do accordingly. The questions largely depend on your experience on your profile. That means if you present your active involvement in transactions/deals, you might get many questions about it. Discussing the deals is considered the most challenging part in an interview.
3. So Why Distressed Private Equity?
Some people say that Distressed Private Equity is more interesting than the traditional buyout firm but some do not agree at all. Whatever the opinion is, Distressed private equity provides a broad range of skills beyond traditional PE, such as credit trading, legal skills, or turnaround. Hence, broad exit opportunities are also available for professions in Distressed Private Equity.