Thursday, 27 November 2014
Last updated 20 hours ago
Mar 15 2010 | 11:13am ET
It’s estimated that women manage only 3% of the $1.5 trillion invested worldwide in hedge funds. That makes Pamela Lawrence a rarity—she’s the co-founder of a distressed debt hedge fund, Restoration Capital Management, which has $385 million in assets under management. Lawrence founded the company in 2001 with Ivona Smith. Today, the Connecticut-based hedge fund boasts four principals with a combined 55 years’ investment experience.
FINalternatives senior reporter Mary Campbell spoke with Lawrence recently about being a woman in a traditionally male field, why distressed debt is more interesting than equities, and why she likes later-stage bankruptcies.
FINalternatives: I’m going to begin by asking you a question you may be tired of answering, but female hedge fund managers are rare to begin with and I’m guessing female managers in distressed debt are even more unusual, is that true?
Pamela Lawrence: There are not a lot of women who run hedge funds or portfolios in hedge funds. In distressed there’s probably one other woman [laughs]...maybe two. One of our investors was a woman-only fund of funds. Before she started her fund of funds, she did a study and it said there were 8,000 hedge funds and about 200 of them were either owned or run by woman managers. If those numbers are even close to being accurate, you’re right, it’s rare.
How did you end up in the area of distressed debt?
I’ve been actually investing in distressed for over 25 years. I started my career at the Rosenwald family office (Sears money). It was a very value-oriented investment approach there, so we invested throughout the capital structure including public and private investment, as well as distressed and bankruptcies…This was the early ‘80s, and we were investing in a lot of bankruptcies, so I always thought it was really interesting.
When I left the Rosenwalds I worked for David J. Greene, a small advisor, and I worked in their special situations department doing bankruptcy investing. I spoke with and worked with a lot of the equity analysts, and I understand it’s a great way to make money, but personally it just seemed boring and uneventful [laughs]. With bankruptcy investing, there are a lot of events, obviously. My old boss at the Rosenwalds had a great way of describing distressed investing, and I use it today when I talk to investors. He said it’s like getting equity-like returns but with the protection of a bond indenture or a bank agreement. And I thought that is really interesting, because you can potentially generate equity-like returns, especially with our approach to investing. We invest more in secured and senior debt in the capital structure, so we do have more protection. So I just thought it was a really interesting way to look at the market. And it’s fun. I spent 12 years doing active workouts and restructuring, and that’s a lot of fun.
How has the financial crisis affected your business or the way you do business?
I don’t think it affected the way we do business or the way we invest. We’ve always focused on distressed investing, and we’ve always focused as a firm on the senior part of the capital structure. That has never changed. And, you know, we change a little bit of our approach according to the market, but you have to do that...Obviously, the whole hedge fund community has gone through a restructuring in the last two years and it’s affected us in the sense that we, like most other funds out there, have suffered from redemptions. We’ve suffered from investors who have been, at least last year, sort of paralyzed, not knowing what the future holds, and trying to reassess their own portfolios and not really able to commit new dollars. So it’s affected our business in that sense, but we have been able to manage it.
Has the crisis affected the way you communicate with investors or potential investors?
Definitely. More investors are asking for more and more transparency and in response to investors’ requests we’re happy to talk with them. We meet with them quarterly—some of them monthly—and we’re happy to talk about our larger positions and what we’re buying in the portfolio, what we’re selling, so we’re happy to talk through the portfolio and our reasoning behind our investments. And I can tell you that, without exception, every single investor that we have and potential investors seem very happy with that.
How do you go about choosing the companies you invest in? Do you have any rules as far as geographic location or sector?
We don’t have a strict rule but what we’ve done so far is really focus on North America. We understand the bankruptcy rules and the restructuring rules here and in Canada. When it gets to European countries and other countries, without people with expertise in those countries and experience and a lot of contacts, it gets really difficult. So we’ve stayed away from that and we’ll continue to stay away from that.
In terms of how we find ideas, our team has a lot of experience, so we use a lot of our contacts within the broker/dealer community, we use our contacts within the financial advisors, and the bankruptcy lawyers. Again, I spent 12 years doing active workouts, so financial advisors are a great source of information.
And then we do all our own internal research. One of the so-called positives about distressed investing is that industries get distressed, so five years ago we were looking at the coal industry. We looked at one company and then, of course, you have to look at all the companies in the industry, and we found another company that was even more interesting and then we made an investment in a company that made conveyor belts that took coal from the bottom to the top of the mine. So these days, obviously, gaming, casinos is a fairly distressed industry. I mean, just about any industry we can talk about is distressed or about to be distressed! But I don’t want to give you the impression that we are macro driven. We do our research, but it is very bottom-up.
When you choose to participate in a restructuring (and I understand this is something you don’t always do), what does your participation involve?
We get involved when we think we can add some value to a restructuring. We are a hedge fund structure, so it’s difficult to go on an official creditors’ committee and be restricted from trading. We really do not want to do that, so if we do, we want to make sure it’s for a very short period of time. In the current market environment, if we think a company is going to be in and out of bankruptcy within six months, we may be comfortable with that but we will typically avoid the 2-5 year bankruptcy situations in this type of market. Again, if we think we can add value, we’ll get involved.
One of our positions is in a relatively small telecommunications company which had about $600 million of debt. It had only $100 million of bank debt, and we were one of the largest bank debt holders. We’ve had a lot of experience in restructurings, and we wanted to make sure we picked the right bankruptcy attorney to represent us, the right financial advisors, so we headed up the steering committee in order to achieve our objectives. But also we expected that it would not be a very long bankruptcy, and in fact it only took about four or five months.
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