Finding Alpha in Distressed Debt | Dan Bird - EMEA Credit and Special Situations

I’ve been hoping to discuss special situations and distressed debt, one of the least hyped but most interesting areas of finance and credit for a while.

Distressed debt investing requires a triple threat skillset: understanding legal frameworks, financial health, and industry landscapes.

It offers unique diversification benefits, standing apart from traditional equity and bond markets, and offers relatively defined investment horizons.

For all these reasons, the potential for alpha generation is significant, but it demands patience and precision.

So when I got the chance to interview Dan Bird’s team who’s been holding senior roles in that space for over two decades, I jumped on this rare opportunity. We explore the complexity of these markets and the skillsets needed to navigate them.

HIGHLIGHTS

Versatility

You have to look at the company, and what it’s doing and determine a value. And sometimes that’s specific assets and sometimes that’s a stream of cash flows. Sometimes that’s intellectual property.

And then you need to be a management consultant. Is this business capable of turning itself around? Are industry forces too far against this company that it’ll never recover? So you need a, you need a lot of different skill sets in order to be successful in this type of industry.

Patience and Timing in Investments

When something in the industry changes. People are reluctant to acknowledge it. People don’t like change. Everyone thinks things revert to the mean. A lot of people involved in the situation tend to have bias just because they’ve been involved in the situation. They tend to overvalue the ability of companies to recover.

At this stage, I was thinking: “yeah, that’s when you, distressed investor, must intervene.” But then Dan added:

That’s the most dangerous time to invest when we don’t really know.

Part of doing this job the right way is finding the right entry point, the right timing. It’s very infrequently early.

Patience does matter in terms of getting into these things. A lot of time,s that doesn’t happen until very long after things start to change.

On Private Credit

We also discussed the rapid rise of private credit:

There’s worry about some of the assets that were originated in that period. We’ll have a little bit more stress. It’s possible. It’ll take a little while to figure that out. From my perspective, that just creates different opportunities.

And I always find it insightful, or surprising, when I hear an insider’s perspective on private markets:

Look, some investors like private assets because they don’t have to mark them to market.

To a public market mindset, this is counterintuitive. It goes against the “illiquidity premium”. One famous critic, Cliff Assness, calls it “volatility laundering”. And I used to agree wholeheartedly, but my perspective has evolved. Of course, marking your own NAV creates Fundzi (fund + ponzi) opportunities. But on the other hand, I can see how you may not want to be subject to the erratic behaviour of Mr Market.

About Dan Bird: As the founder of Thornwood Hill LLP, I specialize in credit and alternatives asset management. With over 25 years of experience in the financial industry, I have a proven track record of managing diverse portfolios across the credit spectrum, from direct lending, to special opportunities and distressed debt to liquid credit. My expertise lies in identifying and executing strategic investment opportunities, ensuring optimal risk management, and delivering strong returns for clients. I am passionate about creating value through innovative and tailored solutions that meet the unique needs of each investor.

* LinkedIn: https://uk.linkedin.com/in/daniel-bird-18456a42

About the Show: Investology is a podcast dedicated to rethinking investment management and uncovering new ways to deliver better outcomes for investors. Listen on every podcast platform, or on YouTube.

An episode produced by Orama:

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About the Host:

George Aliferis, CAIA is the founder of Orama, where he has produced content for many financial brands and multinationals like Amazon, Expedia, Louis Vuitton, and Unilever. Before that, he spent over a decade structuring, marketing and selling complex financial products to institutional clients in Europe and Asia.

Related episodes:

Episode with Aarron Filbeck from the CAIA Association on Private Debt

My Investing & Investment Management YouTube Channels

* Investorama - Separating Investment Facts from Financial Fiction (YouTube)

* Investology - Re-Think Investment Management (YouTube)

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