As founder and chief executive of Caledonia Partners, Brian Lippey invests in real estate, public and private equity, hedge funds, and alternative investments. As former global head of marketing and client management at Mount Kellett Capital, Brian Lippey helped raised a $3 billion private equity fund for global distressed investments.
Hedge funds are often active in distressed securities. This is because such securities offer promising returns if they can be turned around. Because of their distress, these securities sell for prices much lower than their par value. If they recover, they can be sold for substantially higher prices.
Hedge funds can invest in distressed securities through equity or debt. Owning debt in a distressed company is strategically better than owning equity because debt takes precedence in a claim over assets in the event of bankruptcy.
Hedge funds can access distressed debt in many ways including through mutual funds, bond markets, or directly to the distressed firm itself.
Through mutual funds, hedge funds can acquire significant distressed securities in a single transaction, avoiding the market price effects of such acquisitions as well as their associated high transaction commissions.
Through the bond market, hedge funds benefit from regulations that preclude mutual funds from holding securities that have defaulted. This leaves hedge funds with a huge supply of debt to acquire after default.
Hedge funds can also approach the company directly and lend it capital in the form of a bond or credit line to meet its obligations. Hedge funds have the option of doing this alone or through partnering with other financial institutions, spreading out risk.
