Top recruiters say a talent war is brewing as the $800 billion shadow-lending industry starts to hunt for 'scarce and coveted' restructuring pros
- The nearly $800 billion private-credit industry has been relatively quiet on the hiring front for restructuring pros the last couple years.
- But that's starting to change in recent months, with large direct lenders looking to staff up their restructuring teams, according to senior Wall Street recruiters.
- Weathered experts who've made it out of the trenches through the last downturn are scarce and expensive. Demand, and compensation, for top buy-side restructuring pros is expected to further intensify in early 2020, the recruiters said.
- Unlike last crisis, investment banks are seen as less vulnerable to losing their restructuring specialists, making the market for talent all the more competitive.
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Nobody can predict when it'll happen, but eventually the decade-long-and-counting bull market will run out of steam.
For businesses that grab the spotlight when recession clouds form, waiting until the storm hits to properly staff up is a risky and potentially costly strategy.
One of the hottest areas of finance during the bull run, the nearly $800 billion private-credit industry has been relatively quiet on the hiring front for restructuring pros the last couple years.
Weathered experts who've made it out of the trenches through the last downturn are scarce and expensive, and not everyone has been eager to warehouse talent indefinitely. But that's starting to change in recent months, and a talent war could be brewing.
The demand for the best buy-side restructuring pros is expected to continue shooting up in early 2020, according to senior recruiters in the space, and they say the million-dollar salaries historically offered in the past likely won't be enough to lure experienced talent this time around.
"We've seen a significant jump in the recruitment of restructuring and workout professionals over the past two quarters as firms try and anticipate the need in the coming months," said Kevin Mahoney, a senior recruiter at Bay Street Advisers, which recruits senior talent for alternative lenders, as well as an array of other buy-side firms.
For a couple of years now, other types of firms have been tooling up to ensure they're well-equipped when the economy finally sputters and businesses that binged on debt come calling for help.
In recent months, it's been the big law firms raiding each other for top bankruptcy and restructuring experts. And before that, it was the boutique investment banks, like Evercore, Greenhill, and Moelis.
Private credit, also sometimes known as shadow lending or nonbank lending, has more than tripled in assets under management over the past decade, according to Preqin data, with record-low interest-rates and yield-hungry investors unleashing a glut of corporate borrowing.
That undercurrent collided with a retreat from riskier corporate lending by banks, spawning a cottage industry of funds and vehicles to invest in or directly lend to small and mid-size businesses.
The middle-market outfits they typically lend to are riskier and pay higher rates than the Fortune 500 corporate behemoths banks now focus on, resulting in higher returns than investment-grade debt but greater exposure to economic headwinds.
Wall Street doesn't expect the corporate debt hoard to provoke a crisis, at least not in the near term, according to a report from Wells Fargo's chief economist. But an unexpected economic shock or recession would be "exacerbated by the build-up of non-financial corporate debt over the past decade."
Having professionals that can navigate the potential carnage when debt-saddled firms hit a rough patch is key, according to Mahoney.
"For private credit investors, particularly direct lenders, the need to have restructuring expertise in-house is essential, a lesson we learned during the last cycle," Mahoney told Business Insider.
Scarce and coveted
Also referred to as loan-workout specialists, the mandate and skillset for restructuring pros is different than finance professionals focused on sourcing and executing deals.
They specialize in companies facing a liquidity crunch - figuring out how to stem the bleeding and return them to health. Legal expertise and a facility with bankruptcy code is helpful, as well as technical aptitude for finding ways to clean up a balance sheet and shedding debt to revive an otherwise cash-flow positive business.
In addition to spending time in court, where cases are often sorted out, they're critical players in negotiating payment terms and potential debt haircuts with creditors, investors, or corporate boards, depending on whom they're representing.
Hiring for restructurers hasn't been particularly active in private credit the last couple years, according to Jason Schulman, a partner at Long Ridge Partners, which handles recruitment searches for a variety of buy-side firms, including private-credit shops.
But demand has perked up in 2019, with several lenders tapping his firm to help fill out restructuring teams.
"What we've seen at some of the larger private-credit shops, they're definitely staffing up their restructuring groups," he said. He expected that dynamic to continue into next year, adding that "this is definitely on their minds."
Direct lenders, which include giants like Antares Capital, Golub Capital, and Owl Rock Capital, make up the largest chunk of the private-credit pool, with north of $265 billion in assets, according to Preqin data.
Ares Capital, one of the largest alternative lenders with $106 billion in credit assets under management, said at its investor day in May that it was growing its small team of restructuring specialists.
As opposed to distressed-debt funds, which comprise the second-largest asset class in private credit and often angle for restructuring or takeovers from the onset, direct lenders are focused on better-performing companies and want to prevent them from sliding into messy legal proceedings altogether - making the art of negotiation paramount.
"They want somebody who is the adult in the room, who can get everybody together around the table so that it doesn't go to bankruptcy," Alan Lowe, a director at Long Ridge alongside Schulman, told Business Insider.
That's why experience across several cycles and a litany of defaults - and the relationships won from that work - is critical. If you've only been in the industry for eight years, "you've only seen the five same bankruptcies that ever body else has," according to Lowe.
"Senior restructuring professionals with the 'scars' earned from working through prior credit cycles are both scarce and coveted," Mahoney said. "The very best of those that do have either moved into investing roles already or they remain in highly compensated seats at leading advisory firms, neither of which are ideal recruiting grounds for restructuring/workout positions within direct lenders."
Why the next downturn will be different than 2008
Because the rise of private credit has coincided with a 10-year economic expansion, there hasn't been overwhelming need for such expertise at these funds to date, and we've yet to see how they perform in a down cycle.
While large firms typically have at least one seasoned workout pro on staff, they're looking to add to their ranks, the recruiters said.
Hiring a managing director or partner with decades of experience may prove too costly at this stage of the cycle, but "hiring at even the slightly more junior levels means sacrificing highly valuable experience earned during the last downturn," Mahoney said.
Some lenders have resorted to moving underwriters and deals staff into internal dedicated restructuring roles to beef up their ranks. Others have been it waiting out, choosing to revisit the matter in early 2020.
The same dynamic played out in 2008, Mahoney said, with firms caught flat-footed when economy collapsed. But back then, banks were under siege and buy-side investors had little trouble plucking their workout experts.
There are some glaring distinctions between 2008 and 2019, however.
There's the overall expansion in corporate borrowing and private-debt funds. Plus, the heightened competition and pressure to deploy unprecedented levels of dry powder has also led to weaker lending standards and flimsier loan covenants, resulting in more "sloppy" deals that will need to be restructured, Mahoney said.
And this time around, investment banks are well-armored and seen as less likely to suffer defections. Elite boutiques like Evercore and Moelis, in addition to compensating handsomely, have turned their restructuring practices into lucrative enterprises across economic cycles, even with meager default rates.
Moelis, which said it earned record restructuring revenues in the third quarter, aims to advise clients before they even sniff a bankruptcy court - arranging debt buybacks and using exchange offers to lessen the debt load and capture discounts. About 50% of its restructuring mandates are completed out of court, according to the firm.
"The difference then was that even the very best advisory firms and investment banks couldn't afford to keep their restructuring professionals in house, so their buy-side counterparts were able to quickly recruit whole teams," Mahoney said. "Now, the banks and advisory firms are better equipped to retain their people."
Mahoney expects demand for workout specialists to rise sharply in 2020. Direct lenders and distressed debt funds "will need to either be willing to pay more than should be expected in such roles or offer something unique in the position, such as the opportunity to also act as an investor."
Senior buy-side restructuring pros historically command $1 million salaries, depending on the size of the firm and nature of the role, according to Mahoney, while top players at advisory investment banks may earn two-to-three times their private-credit counterparts.
He said he's advising clients to factor in a 20% increase in total cash compensation for top buy-side workout pros in 2020. Long Ridge is expecting a jump as well.
"You're seeing out there the realization that to get the best people you have to pay for it," Schulman said. "The comp has continued to increase and gotten more competitive, so you're seeing firms paying big numbers to get people."