Distressed hedge funds are depleting opportunities, driving up prices and overvaluing companies without performing proper due dilligence, according to distressed buyers who are lamenting the new breed of competitors.
Brandon Stranzl, general partner at Tiedemann BGS Partners in New York, said there is too much capital chasing too few deals. "You can't have a distressed investment if everyone wants to buy it," he stated. Stranzl added he is essentially ignoring the distressed market now because he expects returns to be sub-par and is instead waiting for capital, namely hedge funds, to exit that market. "We're in a speculative bubble. You could almost take 'hedge' and attach it to 'funds' in a similar manner to 'dot' and 'com'... it can't be good wherever it's going to end up," he lamented.
Scott Victor, managing director at SSG Capital Advisors in Philadelphia, said deals are being bought at very high multiples and a lot of hedge funds have come into lower middle market investing. "When looking at a company, you have to get in there quickly and you have to do due diligence," he noted.
Hedge funds are throwing money around so carelessly that they will inevitably incur future losses on some distressed paper, predicted Robert Lass, managing director at middle market distressed investor Radius Equity Partners in Chicago. "We've been seeing a lot of hedge funds doing two days of due diligence on a $500 million deal where a company has busted 10 covenants or is in default," he said. In contrast, Radius is currently looking at an unspecified middle market company with 19 factories across the country and has deployed 10 to study it.