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Distressed Investors Make Rich Gains On High-Risk Plays

Despite the continued layoffs afflicting Wall Street and concerns over reduced compensation, the record levels of distressed debt activity are putting at least one group of portfolio managers in the money. According to a Greenwich Associates survey, U.S. distressed debt managers earned on average $732,000 in 2001, compared to $570,00 for high-yield bond managers. Credit derivative portfolio managers, meanwhile, on average earned $543,000. "The risk posture, or risk-reward, of the investments is the key driver in the higher compensation afforded to these individuals," said Greenwich marketing analyst Bill Staikos. The remuneration compares to an average compensation of $321,000 for U.S. fixed-income managers, the survey reports.

The 2001 figures represent at least part of the big push in distressed debt activity that has been sweeping the market. "As for a potential increase in compensation for 2002, although I would rather not speculate, I would expect at least an increase comparable to that for 2001," said Staikos. Distressed debt investing, meanwhile, continues to grow and, though 2001 was a record year for bankruptcy, already in 2002 there have been three of the biggest bankruptcies in history. The returns available in distressed debt also compare well with other asset classes. While other investments are showing negative returns or returns in the low single digits at best, distressed investing offers a possible 15-35% return (LMW, 6/24).

But it is not just the increased risk that leads to the extra compensation, it is also experience and qualifications, according to Staikos and the Greenwich report. "Additionally, portfolio managers in these investments are individuals with a great deal of tenure and knowledge beyond the market, and there are fewer people with this market knowledge as compared to investors using mortgage-backed securities or emerging market debt instruments for example," he added. The need for experience to manage these investments is highlighted in the selection by pension funds of seasoned managers, such as Angelo Gordon & Co., Credit Suisse First Boston and Oaktree Capital Management, which have been grabbing the lion's share of new distressed debt mandates from public pension funds, according to iisearches. com.

 

Comparison of Manager Compensation
PORTFOLIO SALARY BONUS MEAN TOTAL COMPENSATION
MANAGERS 2000 2001 2000 2001 2000 2001
Credit Derivatives $192 $194 $331 $350 $523 $543
High-yield Bonds $190 $210 $340 $360 $530 $570
Distressed Debt $179 $185 $524 $547 $703 $732
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