E139: How HIG Went from $75 Million to $67 Billion AUM
Digest
This podcast details HIG Capital's 16-year journey in distressed debt investing, from a small fund to a $68 billion global firm. It explains distressed debt, its high yields, and the importance of assessing default probability and enterprise value. HIG sources opportunities by monitoring underperforming companies, leveraging relationships, and using its network. Their due diligence is rigorous, focusing on debt purchases at a discount. While distressed sales are zero-sum games, HIG emphasizes open communication and cooperation with other lenders. Their investor base consists largely of tax-exempt entities due to the significant interest income. HIG maintains investment discipline through quantitative data and three-statement models, avoiding retrospective bias. Successful distressed debt investors are optimistic, curious, and rigorously analytical. HIG's portfolio construction emphasizes diversification by company, industry, and crucially, by causal factor to mitigate correlated risks. Finally, the podcast highlights the increasing importance of management team quality and fundamental analysis, and the compounding benefits of relationships and firm scale.
Outlines
HIG's Distressed Debt Strategy: Growth and Investment Approach
This podcast chronicles HIG Capital's 16-year growth in distressed debt, detailing their investment strategy from sourcing opportunities to portfolio construction and risk management. It highlights their focus on first-line debt, rigorous due diligence, and the importance of relationship building in a competitive market.
Understanding and Managing Distressed Debt Risks
This section defines distressed debt, explains its inherent risks, and details HIG's risk mitigation strategies, including their focus on first-line debt and diversification by causal factor. It also discusses the importance of thorough due diligence and the assessment of enterprise value relative to debt.
Tax Implications, Investor Base, and Long-Term Success Factors
This section covers the tax implications of HIG's investment strategy, its investor base, and the key characteristics of successful distressed debt investors, emphasizing the importance of optimism, curiosity, and rigorous analysis. It also discusses the long-term benefits of relationship building and firm scale.
Keywords
Distressed Debt
Debt trading at a significantly higher yield than comparable government bonds due to perceived default risk. Investors seek opportunities where enterprise value exceeds debt.
First-Line Debt
Senior-most debt in a company's capital structure, offering priority in repayment. Minimizes downside risk in distressed situations.
Causal Factor Diversification
Portfolio diversification strategy minimizing exposure to common underlying risks impacting multiple investments.
Portfolio Construction
Strategic process of building an investment portfolio, considering diversification, position sizing, and risk management.
Alternative Credit
Investment category beyond traditional bank loans, including distressed debt and private credit.
Due Diligence
Thorough investigation and analysis of a potential investment, particularly crucial in distressed debt situations.
Relationship Management
Building and maintaining relationships with other lenders and industry professionals in the distressed debt market.
Risk Mitigation
Strategies employed to reduce potential losses in distressed debt investments, including diversification and focus on first-line debt.
Investment Strategy
HIG's approach to distressed debt investing, encompassing sourcing, due diligence, and portfolio management.
High-Yield Investing
Investing in assets offering returns significantly above average, often associated with higher risk.
Q&A
What is HIG's investment strategy in distressed debt, and how does it mitigate risk?
HIG focuses on first-line debt and diversifies by causal factor to reduce correlated risks. They prioritize investments where enterprise value significantly exceeds debt.
How does HIG source distressed debt opportunities?
HIG monitors underperforming companies, leverages relationships with industry professionals, and utilizes its internal network.
How does HIG manage relationships in distressed sales?
HIG prioritizes forthright communication and cooperation with other lenders, recognizing the interconnected nature of the market.
What key characteristics distinguish successful distressed debt investors?
Successful investors are optimistic, curious, and rigorously analytical.
What is the importance of diversification by causal factor?
Diversification by causal factor is crucial because distress often stems from common underlying factors, ignoring this can lead to increased risk.
Show Notes
Highlights:
H.I.G. Capital’s Growth: How the firm expanded from a $75 million fund in 1993 to managing over $67 billion across multiple asset classes, including private equity, real estate, infrastructure, and credit.
Understanding Distressed Debt: The mechanics of distressed debt investing, including yield benchmarks and risk perceptions in distressed securities.
Risk Management in Distressed Investing: How H.I.G. constructs portfolios with a high hit rate and limited downside by focusing on first-lien debt.
Sourcing Distressed Opportunities: The unique ways distressed debt investors find deals—often without companies even being aware of the transactions.
Building Strategic Relationships: Why success in distressed debt relies on long-term relationships with restructuring attorneys, turnaround consultants, and industry insiders.
Portfolio Diversification Beyond Industries: The importance of avoiding over concentration in single risk factors, such as interest rates or energy prices, rather than just industry or geography.
The Role of Optimism in Distressed Investing: Why successful investors need to see beyond the immediate problems to uncover long-term value.
Lessons from 16 Years at H.I.G.: Jackson’s biggest takeaways, including why leadership stability is often a key indicator of a company’s strength.
H.I.G.'s Investment Philosophy: A deep dive into the firm’s focus on small and mid-cap, value-oriented, cash flow-centric investments and its commitment to seeking out complexity.
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Guest Bio:
Jackson Craig is the Managing Director and Co-Head of H.I.G. Bayside's U.S. Special Situations and Distressed Debt Strategy, overseeing investments in special situations, restructuring, and turnaround opportunities. With over 20 years of experience in private equity investing, Jackson has been instrumental in the firm’s growth and success in alternative investments. His expertise spans private equity, credit markets, and distressed investing, making him a leading voice in the industry.
Our Podcast now receives more than 300,000 downloads a month. Are you interested in sponsoring an episode? Please email David Weisburd at dweisburd@gmail.com.
We’d like to thank @JuniperSquare and @ReedSmith for sponsoring this episode!
#VentureCapital #VC #Startups #OpenLP #AssetManagement
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Sponsor:
Juniper Square is dedicated to transforming the private markets investing experience. The company provides a full range of modern, connected fund technologies and services for over 2,100 private markets GPs across fundraising, reporting, fund administration, treasury, compliance, and business intelligence. Today, over $1 trillion of assets and 600,000+ LP accounts are managed through Juniper Square software and fund administration services. Learn more at www.junipersquare.com.
Sponsor:
Reed Smith is a dynamic international law firm dedicated to helping clients move their businesses forward. With an inclusive culture and innovative mindset, Reed Smith delivers smarter, more creative legal services that drive better outcomes for their clients. Their deep industry knowledge, long-standing relationships and collaborative structure make them the go-to partner for complex disputes, transactions, and regulatory matters. Learn more at www.reedsmith.com.
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Stay Connected:
Twitter:
David Weisburd: @dweisburd
LinkedIn:
David Weisburd: https://www.linkedin.com/in/dweisburd/
Jackson Craig: https://www.linkedin.com/in/jackson-craig-458b645b/
Links
H.I.G. Capital: www.higcapital.com
Questions or topics you want us to discuss on How I Invest? Email us at dweisburd@gmail.com.
(0:00 ) Episode preview
(1:25 ) Understanding distressed debt investment
(4:53 ) Identifying and assessing distressed debt opportunities
(7:24 ) Investment process and due diligence
(9:02 ) Sponsor: Juniper Square
(9:36 ) Relationship management and distressed sales
(10:39 ) Tax considerations and investor base
(11:33 ) Investment discipline in distressed debt
(12:36 ) Success factors in distressed debt investing
(14:43 ) Portfolio diversification and risk management
(19:03 ) Sponsor: Reed Smith
(19:38 ) Evaluating business quality and management in distress
(21:02 ) Navigating the bankruptcy process
(22:02 ) Long-term strategy in distressed investing
(23:19 ) Overcoming sourcing challenges
(23:48 ) HIG's distinct investment approach and LP feedback
(25:21 ) Competitive advantage in distressed markets
(25:45 ) Closing remarks
Table of contents
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