The University of North Carolina at Chapel Hill may look to hire one additional distressed debt manager over the next six months. The roughly $1 billion endowment is nearing the top of the allocation range with which it is comfortable, but there may be an opportunity to move a little higher, according to Mel Williams, v.p. and director of private equity investments. "The distressed market is still attractive, and there are some strategic gaps [in our portfolio] that we might be able to fill with a new manager," Williams said. He noted, however, that it has yet to be determined whether any additional investment will go to a new manager or an existing one. UNC's seven-person investment team will make a decision before the end of the year on the additional allocation and how to best fill it.
Distressed investments represent some 6-8% of the endowment's overall portfolio and are split between its allocation to buyouts and its allocation to enhanced fixed-income, Williams noted. UNC invests in distressed debt both as an equity play meant to gain control of a company and as a trading opportunity, he said, adding that how an investment is categorized depends upon the strategy the manager employs. "On the control side of investing, distressed is a great way to manufacture equity at attractive earnings multiples," he said. "From a trading standpoint, spreads are wide and defaults are at a peak, making distressed a good long-term hold."
Most recently, UNC invested $10 million with Resurgence Capital Partners and awarded an additional $13 million to MatlinPatterson Asset Management, formerly part of Credit Suisse First Boston. The endowment initially invested $10 million with MatlinPatterson in July 2001 and boosted its investment this spring as the firm closed its $2.2 billion Global Opportunities Partners fund, Williams said. The Resurgence mandate was awarded in May and is invested through the firm's third fund, Resurgence III, he noted. UNC also has "quite a bit of money" invested with Oaktree Capital Management for both the control and trading strategies and has a pure trading investment with Contrarian Capital Management.