Hedge Funds Circle Around Debt-Binge Firms

(Bloomberg) -- Hedge funds and private equity firms are positioning to profit from the collapse of companies in Europe that have binged on debt.

Investors have built up their distressed debt businesses by the most in at least two years in the region, according to data compiled by headhunters Paragon Search Partners. They’ve added a net 19 new traders, money managers or analysts in 2018, compared with a total of seven in all of 2017 and a contraction of staff numbers in 2016, the data show.

The move suggests that the investors predict that there will be fallout they can make money from when central banks beat a retreat from an era of unprecedented stimulus. Consensus in the industry is for a credit market downturn within the next 12 months to 18 months, according to Anthony Robertson, the chief investment officer of Cheyne Capital’s recently formed distressed-debt business.

“There are a number of impending warning signs now,” said Robertson, who is seeking to raise at least 750 million euros ($871 million) for the unit and has hired 10 people since starting last year. “You can’t wait till the down cycle kicks in and then look to build a team because at that juncture you’ll be too late.”

Economic Downturn

Slowly, but surely, central banks around the world are unwinding the easy money they spent a decade injecting into the global economy. The ECB has started rolling back stimulus measures and will end a program that’s seen it buy $190 billion of corporate bonds in little more than two years.

That’s a problem because it means borrowing costs are set to rise for companies, just as political upsets like gathering trade wars and Britain’s withdrawal from the European Union threaten prosperity and put pressure on their earnings.

There are already signs President Donald Trump’s U.S. tariffs on steel and aluminum imports are threatening corporate earnings in Europe. A full-blown global trade war could cost the global economy about $470 billion by 2020, according to Bloomberg Economics.

Other distressed funds that have appointed, or plan to hire, staff include Kyma Capital, the new venture of former GSO Capital Partners’ executive Akshay Shah, Mubashir Mukadam’s Blantyre Capital and HPS Investment Partners.

New Hires

Shah says Kyma plans to recruit six investment analysts and traders by the end of the year, while Blantyre appointed a former principal in KKR & Co.’s European special situations team in London to be a distressed-debt analyst, people familiar with the matter said in April. HPS hired Rick Morris from Goldman Sachs Group Inc. earlier this year to create a new unit that will buy distressed debt, separate people familiar with the matter said in February.

A spokesman for Blantyre declined to comment on recruitment, while officials for HPS didn’t immediately respond to a request for comment.

Shah said he doesn’t have a view on when the cycle will turn and intends to build a business that can find distressed investments in all economic environments. The explosive growth of the European high-yield bond market over the past decade means there could be more opportunities for funds like Kyma, he said.

Financial Crisis

The last time funds went on a recruitment drive for distressed debt personnel in Europe was just after the financial crisis when a host of U.S. funds set up offices in London, seeking to profit from a fire-sale of assets from the region’s beleaguered banks.

“There may be fewer hires from startup funds going into the new cycle,” said Andrew Perry, managing director at Paragon Search Partners in London. “But there are a greater number of existing teams that will all be looking to staff up, so the overall numbers could be as big this time around as during the previous boom.”

There are currently around 110 funds in Europe with more than $100 million of capital invested in distressed debt and special situations, according to data compiled by Paragon. That’s at least a third more than there were in 2007, the data show.

“People have been calling the end of the credit cycle for what feels like forever,” said Louisa Watt, who advises distressed debt funds as a partner and global co-chair of Brown Rudnick LLP’s special situations business in London. “Those cries are louder now than they used to be.”

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