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The Road Ahead for Distressed Debt: The Next Credit Cycle is Around the Corner

Featured Events | Nov 04, 2019 |

When most people in the finance industry think about distressed debt, they think about failure. But there can be big wins for those willing to take on this challenging asset class. That was ever apparent on October 25th at the standing room only Distressed Debt Conference, sponsored by the Gabelli Center for Global Security Analysis and Columbia Business School’s Restructuring and Distressed Investing Club.

Distressed debt – bonds or debt issued from companies that are either in bankruptcy or on the verge of it – presents investors with an opportunity to gain control of the company once it enters bankruptcy. During the conference, participants discussed a wide range of topics ranging from the likelihood of returns in a looming recession, the opportunities for women to succeed in this male-dominated industry, and advice for those who want to begin a career in the distressed debt business.

A “Tough” Asset Class

Often referred to as vultures, grave dancers, and many other unflattering names, distressed debt investors tend to have a bad reputation even though they supply companies with the liquidity that these companies need to reorganize and potentially come back stronger.

Panelists at the conference hailed from various backgrounds: portfolio managers, advisors, attorneys, and business professors. Although their opinions on credit cycles and value investing may have differed, they all spoke about the abundance of opportunity they have experienced within this asset class.

One panelist noted that while it is hard to make money in the current credit market, the opportunity to do so may come as the credit cycle heads towards an impending recession. Event moderator and host Michael Gatto, senior partner at Silver Point Capital and adjunct professor at both Columbia Business School and the Gabelli School of Business, said that one key takeaway from his experience in this area of investing is to have enough “dry powder” so you’re prepared when the next downturn occurs.

Another expert, who started out at Goldman Sachs and spent the majority of her career there, said she learned that investing meant more than valuations and balance sheets. She reflected on her past successes and failures, and boldly admitted her worst trade. She emphasized the importance of conducting due diligence on the management teams of companies you invest in, as all of her investment mistakes were tied to companies with weak management teams.

Women in Credit: The Opportunities Exist

One panel discussion featuring Ellen Carr, adjunct professor at Columbia Business School, Carla Casella, managing director at JPM High Yield Research, Natasha Labovitz, partner and chair of the Bankruptcy and Corporate Reorganization Department at Debevoise & Plimpton, and Ivona Smith, managing director at Drivetrain, LLC and independent board member of The Weinstein Company, addressed both the challenges and the opportunities for women in the traditionally male-dominated finance industry.

On this panel, it was noted that only 10 percent of all portfolio managers are women and, of that number, only one percent of global asset management funds are controlled by women.

Despite these low numbers, each panelist agreed that throughout their careers they have not felt discriminated against to the degree that women in other industries have. Instead, at times, they said they felt empowered, even memorable, as a member of a team that stood out because of their unique offerings.

Another panelist emphasized that mentorship, with male and female leadership mentors, is crucial to paving a way to a successful career path. Again, all panelists agreed that mentors played a significant role in the outcomes of their careers.

Breaking into the Distressed Debt Business

For those members of the audience looking for their next career move as a Senior Analyst or seasoned investment professional, many panelists offered advice and tips for success. Aside from working hard and being the “first one in the office and the last one to leave,” many of the experts agreed that being honest and trustworthy are essential. Being truthful about your weaknesses and strengths, as well as about what you know and what you don’t know, are a must. Additionally, being a trustworthy colleague and investor is a requirement for long term success in an industry where your reputation is everything.

Patience in investing, being honest with yourself and your clients, and having a high adversity quotient – in other words, being able to resiliently face setbacks at a high degree – were also cited as critical attributes of the most successful hedge fund founders/portfolio managers. Many of the skills and qualities that recruiters are searching for can be applied to any career path, but what is different in the distressed debt business is that firms are looking for candidates able to articulate resilience and how they can bounce back from challenges.

With the opportunities and challenges ahead for those interested in venturing into this industry, students and professionals alike may wonder, “What makes distressed debt such a challenging yet rewarding area of investing?”

“It’s a tough asset class that has a lot of elements of confrontation,” said Gatto. “There is a part of the business that is ugly because when companies are going through restructuring, a lot of people are going to lose money. It’s fundamentally a different asset class from what most people normally invest in.”

However, due to real barriers to entry, special skill sets and technical pressure, and with more sellers than buyers during the early part of the recession, this asset class has proven to provide investors with superior risk-adjusted returns.

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