1. Distressed Investing for the
Long Run
Marc Sherman
Dalton Investments
CFA LA Presentation, October 2014

2. What You Need to Know
Distressed Debt Analysis:
Strategies for Speculative
Investors
By Stephen Moyer
Competitive Strategy: Techniques
for Analyzing Industries and
Competitors
By Michael E. Porter
The Art is in
Connecting the Two

3. Distress Comes and Goes
Time
Distress
If It Were Only This Predictable …

4. Business Perspective: How Long?, How Deep?
What Flavor?
Time
-Distress+
Time?
Time?

5. Business Questions for the Long Run
Time
-Distress+
Price
Yield
Strategy: Return Bogey? Long Only or Long-Short?
Asset Allocation: SP? Credit? Equity?
Staffing: How Many? What Skills? “R & D”?

6. The Nature of a Distressed Investment
$200 mn bonds
at 70 cents
Bonds drops to 3
cents; $55 mn DIP
was converted to
equity
Company focuses on
EBITDA; refinances
ABL, buys back stock
FLWS buys Gift for $142.5 mn
BK
Entrance/Exit
BK Valuation $75M
Well Known Gift
Bus.
Majority of the Return Came through
Re-Org Equity

7. Distressed Investing for the Long Run
• Key Success Factors:
– Long-Short Credit and Equity
– Match Liabilities with Assets (ALM)
• 3 Year Lock-up/Commitment
– Return Bogey defined relative to HYG
• Adapt to the Risk/Return Opportunity Set
– ‘Center of Gravity’ Credit, Equity as a Hedge or ‘Parking
Place’ while awaiting Credit Opportunities
– Less Positions, More Business Knowledge
• 15-20% (cost) Maximum Position Concentration
– Fees
• Maintain Detailed Business Knowledge
• Do the “R & D” to find the Next Opp. Set

8. Distressed Investing for the
Long Run
Questions/Conclusions