distressed investment Flashcards
what is distressed investment
Distressed securities are securities over companies or government entities that are experiencing financial or operational distress, default, or are under bankruptcy.
Distressed securities tend to trade at substantial discounts to their intrinsic orpar valueand are therefore considered to be below investment grade.
reward of distressed investment
As a result of the issuing company’s inability to meet its financial obligations, these financial instruments have suffered a substantial reduction in value, but because of their implicit riskiness, they offer investors the potential for high returns.
type of distressed security
Distressed securities can include common and preferred shares, bank debt, trade claims and corporate bonds.
important points of distressed investment: 5 point
- Distressed companies are either in bankruptcy or have a meaningful likelihood of filing for bankruptcy.
- Distressed companies don’t have the cash flow to service their debts and are fighting the clock.
- Distressed investing is distinct from turnaround investing: Turnaround companies are not fighting the clock.
- Distressed investing usually involves greater risk than turnaround investing, but can also offer higher returns.
- Bonds can provide greater downside protection than equities
Distressed investment Strategies
1.Distressed-to-Control or Loan-to-Own strategies where the investor acquires debt securities in the hopes of emerging from a corporate restructuring in control of the company’s equity;
Distressed debt can be a great way to invest in a turnaround situation because debt is given preference to equity in the event of bankruptcy. That is to say that while a stock’s value in bankruptcy is usually zero, debt often retains some of its value in a worst-case scenario, limiting downside risk if a turnaround fails.
2.Special Situations or Turnaround strategies where an investor will provide debt and equity investments, often “rescue financing” to companies undergoing operational or financial challenges.
different between hedge fund and mutual funds
. Hedge funds differ significantly from mutual funds, however, because hedge funds are not required to register under the federal securities laws. That’s because they generally only accept financially sophisticated, high-net-worth investors. Some funds are limited to no more than 100 investors.
what is hedge fund
Hedge fund" is a general, non-legal term that was originally used to describe a type of private and unregistered investment pool that employed sophisticated hedging and arbitrage techniques to trade in the corporate equity markets. The term "hedge fund" referred to an asset class employing a strategy to offset its market risk exposure by taking an opposing position - for example, selling short or holding futures. In fact, a perfect hedge is one that totally offsets gains and losses, creating a position that is completely neutral. In today's markets, a hedge fund can be just about anything.
how investor excess to distressed investment
Access to distressed debt comes via several avenues for hedge funds and other large institutional investors. In general, investors access distressed debt through the bond market, mutual funds or the distressed firm itself.
Bond market - The easiest way to acquire distressed debt is through the market.
Mutual funds - Hedge funds can also buy directly from mutual funds. This method benefits both parties involved.
Distressed firm - The third option is perhaps the most interesting. This involves directly extend credit on behalf of the fund. This credit can be in the form of bonds or even a revolving credit line. The distressed firm usually needs a lot of cash to turn things around; if more than one hedge fund extends credit, then none of the funds are overexposed to the default risk tied to one investment. This is why multiple hedge funds and investment banks usually undertake the endeavor together.
private equity secondary market
For the vast majority of private equity investments, there is no listed public market; however, there is a robust and maturing secondary market available for sellers of private equity assets.
The private equity secondary market (secondaries) refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds.
Sellers of private equity investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds. By its nature, the private equity asset class is illiquid, intended to be a long-term investment for buy-and-hold investors, including pension funds, endowments and wealthy families selling off their private equity funds before the pools have sold off all their assets.
two type of secondary transaction
1.Sale of fund interests
2.Sale of direct interests
This category is the sale of portfolios of direct investments in operating companies, rather than limited partnership interests in investment funds. These portfolios historically have originated from either corporate development programs or large financial institutions.
