E139: How HIG Went from $75 Million to $67 Billion AUM
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How did HIG grow from $75 million to $67 billion in AUM?
You've been at HIG for 16 years and the firm has really grown through your tenure. Tell me about how HIG has grown over the 16 years that you've been there. HIG is a platform. Starting in 1993, 75 million first fund, very strong performance. Fast forward to today, 67 billion in assets under management, 19 offices, over 500 investment professionals. And in addition to private equity, a fully developed alternative credit platform with both the stress debt and direct lending, a real estate effort, an infrastructure effort, and a growth equity effort. And all of those in US, Europe, and Latin America. HIG has really grown from a small private equity fund decades ago to the $68 billion behemoth today. How did HIG grow?
First and foremost, performance. And so very strong performance, especially in the flagship equity product, top decile for a number of years, really, really strong investor demand that allowed the firm to say, okay, we can raise more capital. Investors are asking us to manage more money, but we don't want to lose our discipline. We don't want to grow out of our space. How do we accomplish that? We need to grow geographically. We need to grow into adjacencies. And so that's what they did. They really grew, grew laterally into these strategies. and then geographically first into Europe and then second into Latin America.
What is distressed debt and how is it defined?
So you're co-head of HIG's distress strategy. What is distress debt? Good question. The traditional definition of distress debt is debt with a yield 1,000 basis points or more greater than the reference treasury. So what do I mean by that? For a five-year corporate bond, if the five-year U.S. treasury is yielding 4%, that corporate bond would need to have a yield of 14%, 10 percentage points, 1,000 basis points greater than the treasury in order to be considered distressed. That's the benchmark that people use to distinguish between that debt's the distressed and that's not. That's where people draw the line, which might ask you to beg the question, why would debt have such a high yield? It's really in yields that start to approach what you would expect to see for total returns on equity securities. The reason for that is, a perception of the probability of default and an impairment of recovery. So is this debt going to pay interest for the full life of it? Maybe, maybe not. The borrower's a little shaky.
Is value going to be sufficient to cause this debt to be repaid and pull at par in cash on or before the maturity date? Maybe, maybe not. The borrower's a little shaky. And so that increased perception of risk, that increased probability of default is what causes debt to trade at these very high yields. I'm very intrigued. You said the perception of risk on an HIG portfolio. How much of the portfolio are you expecting to go to zero? How much to pay back? And tell me about how you construct a portfolio around that.
How does HIG construct a resilient portfolio?
Yeah, it's a good question. We have a pretty specific and distinct approach to investing. And so our hit rate is very high. And when we do take losses, they tend to be fairly light. Very rarely, maybe once or twice in my 16 years here, maybe less, have we lost all our money. We focus on first lien debt, so top of the capital structure, first in line in the waterfall to get paid off. We focus on debt that we think is maybe outside of debt capacity, but inside the total enterprise value of the borrower. And so while there's some equity risk to it, we think the totality of the enterprise value is sufficient to cover our debt. Our model is much more focused on the safest, least risky top of the capital structure and try to buy things inside of enterprise value.
Just to simplify that, you might have a company that's worth $500 million and has $100 million in debt. You're nowhere near the $500 million in equity value. So even if the company goes down equity value, you're still going to get paid back. Exactly right. And so prototypical capital structure, if it's a healthy, stable business, debt capacity might be 60% to 70% of total enterprise value. Well, if the face amount of the first lien debt that we're looking to buy constitutes 90% of the enterprise value. We've got a 10% equity cushion beyond the face amount of the debt, and we're purchasing it for something significantly less than that.
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Chapters
8 chapters
1
How did HIG grow from $75 million to $67 billion in AUM?
0:00–1:25
2
What is distressed debt and how is it defined?
1:25–2:48
3
How does HIG construct a resilient portfolio?
2:48–7:04
4
What strategies does HIG use to source distressed debt opportunities?
7:04–12:30
5
How does HIG manage relationships in distressed sales?
12:30–15:38
6
What is the impact of tax efficiency on HIG's LP base?
15:38–19:03
7
How does HIG ensure investment thesis discipline?
19:03–22:53
8
What makes someone great at investing in distressed debt?
22:53–25:54
Speakers
1 identifiedMore from How I Invest with David Weisburd
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