Although the worst of the COVID-19 pandemic is behind us, the global economy continues to struggle from its aftereffects. Many businesses are still struggling to survive, and some are facing bankruptcy. For businesses that find themselves in this situation, an alternative investor is emerging: hedge funds that specialize in buying distressed debt and assets. These funds compete with private equity firms, which traditionally have dominated the market for distressed companies.

Hedge funds are one type of entity that provides capital to the private credit market, and they have several advantages:

  1. Fast: They can act faster, as they do not need to raise funds from limited partners or seek regulatory approvals.
  2. Flexible: They can offer more flexibility, as they can buy different types of securities, such as bonds, loans, or equity, depending on the situation.
  3. Boundless: They can take more risks, as they are not bound by the same fiduciary duties as private equity managers.

Even with the advantages offered by hedge funds, they also come with some challenges in their quest for distressed companies:

  1. Legal Issues: They must deal with complex legal issues, such as creditor rights and bankruptcy proceedings.
  2. Uncertainty: They have to cope with high volatility and uncertainty, as the value of distressed assets can change rapidly depending on market conditions and court decisions.
  3. Stakeholder Resistance: They contend with the resistance of some stakeholders, such as employees, customers, or regulators, who may prefer a more stable and long-term owner.

The battle between hedge funds and private equity for distressed companies is likely to continue to intensify, as more businesses succumb to the economic crisis. The outcome of this competition will have significant implications for the future of many industries and sectors including:

Liquidity and Investment Restrictions

Hedge funds typically focus on purchasing the debt of distressed companies to profit from short-term price fluctuations. They buy liquid debt securities that can be sold quickly for a profit.

In contrast, private equity firms that specialize in distressed investments take a different approach, by buying equity in troubled businesses rather than debt. Their goal is to restructure the business, turn it around, and eventually sell it or take it public.

The difference lies in liquidity, whereas hedge funds prioritize short-term liquidity, and private equity firms are willing to lock up capital for longer periods to achieve their turnaround objectives.

Legal Battles and Debt Ownership

Hedge funds are challenging private equity firms over restrictions that dictate who can lend to or buy the debt of buyout-backed companies. And private equity portfolio companies can be particularly exposed to interest rate rises due to their reliance on debt for acquisitions. Some hedge funds are considering legal action to capitalize on the surge in corporate distress.

While both hedge funds and private equity firms operate in the distressed space, their strategies differ significantly. Hedge funds focus on short-term gains from distressed debt trading, while private equity firms take a longer-term view by investing in troubled companies’ equity and actively participate in restructuring efforts.

The implications of this battle between these two groups are how distressed companies are managed, financed, and ultimately turned around during challenging economic times.

We know that each situation is unique, and we recommend working closely with financial experts, consultants, and advisors like JACO, to help you navigate through your period of distress.

Give us a call, or drop us an email so we can learn more about your business and the challenges you are facing.

About Jeff

Jeff has over 25 years of strategic planning, business development, and business transformation leadership experience. Having worked with mid-market, closely-held and family-owned businesses his entire career Jeff has a unique understanding of how these enterprises operate and the challenges they face.

He is passionate about working with business leaders to build strong cultures while developing and executing strategies that deliver exceptional results that benefit all the company’s stakeholders. Jeff’s hands-on approach to working with companies begins with a commonsense approach to strategy development.

With extensive experience in organizational turnaround and growth Jeff follows a defined process (disciplined, focused, intentional) to guide clients from strategy to execution. His experience covers a multitude of industries, with an in-depth understanding of automotive manufacturing.

Jeff holds a Master’s in Business Administration from the Capital University School of Management and earned a Bachelor of Arts in Business Administration and Management from Ohio Dominican University.