Wharton@Work

May 2020 | Finance

Corporate Restructuring and Distressed Asset Investing

“Nobody knows.” That is the title of a memo written to Oaktree Capital Management investors on March 3 by co-founder and co-chairman Howard Marks. Oaktree is the largest investor in distressed securities worldwide, and is reportedly seeking to raise at least $3 billion for a new distressed assets fund. Marks notes that while investing inherently means positioning to gain from future developments, no one can know what those future developments will be. “This is the paradox we must deal with,” he says.

The paradox is clearly not holding Oaktree back. As the current health and economic crisis deepens, the number of financially strapped companies is growing — and their revenues are dropping. In fact, the stage is set for many investors like Marks who have been waiting for more than a decade to deploy capital in what has been described as a once-in-a-lifetime opportunity.

But for CFOs and other senior leaders of highly leveraged companies who need new investors, the current crisis has landed them in uncharted waters. As revenue dried up seemingly overnight, so did access to conventional capital. As they look for new sources of investment capital, they see distressed asset investors but have often never dealt with them before.

For those looking at distressed assets as an investment for the first time, it is crucial to know how to identify and value them. “Before you invest in a distressed asset, there are a lot of calculations that need to be made,” says Kevin Kaiser, senior director of Wharton’s Harris Family Alternative Investments Program. “Just because the price of an asset is low compared to where it was six weeks ago doesn’t mean you’re getting a good deal at the current price. It may look like a bargain, but it’s not that simple. You need to know what the value is going forward, and how leveraged the company is, for example, because if the business goes into bankruptcy your investment could disappear.”

Distressed Asset Investing and Corporate Restructuring, a new program that will initially be launched online, is designed to help both groups move forward with greater skill and confidence. Held from June 8 to June 12, it is taught by the Wharton finance faculty who teach in the on-campus program. The program requires a high level of engagement, and its synchronous peer learning provides multiple opportunities to work and network with fellow participants.

“If you’re a CFO whose company is facing distress, you need to understand the investors who may approach you,” says Kaiser. “We’re going to introduce you to these players and show you how they think. They are very different from the investors you’ve dealt with before, and if you don’t have them figured out, you may quickly find yourself in over your head. We will show you what to expect, how to handle your new investors, and how to help them get you through to the other side.”

Kaiser will explain the principles and concepts that guide distressed assets investors. He says these investors are like surgeons: they are very good at diagnosing why a business is in trouble, making tough decisions, and following a proven process for getting it back to health. “They know that for you to survive, you probably can’t stay in your current form,” he explains. “Just like a cancer surgeon removes a tumor to save a patient, you may need to lose part of your business. But it’s important to remember that even great management teams are going through this — the crisis is not discriminating. You have a responsibility to your employees, suppliers, debt holders, and shareholders to recover what you can.”

It is this kind of solid, foundational learning that can make a difference for investors and business leaders alike. Whether the current crisis presents a once-in-a-lifetime opportunity, as Howard Marks stressed, “nobody knows.” But, says Kaiser, that is not a reason not to invest. “It’s not a reason to be paralyzed. No one knows the future, but there is a process that works, and the investors who are buying right now understand it and are very good at it. Leaders in the companies they are investing in need to understand it too. When you know how to navigate, you’re going to be able to move forward.”