Question

Financial buyers (both hedge funds and private equity investors) clearly are motivated by the potential profit they can make by buying distressed debt. Their actions may have both a positive and negative impact on parties to the bankruptcy process. Identify how parties to Hostess bankruptcy may have been helped or hurt by the actions of the hedge funds and private equity investors.

Answer 1

Hedge funds and private equity investors are always on a lookout to make money out of distressed assets. It can be by disintegrating the asset and selling it for parts so that they make more than what they paid for it or it can also involve helping the firms and assets to make a comeback and regain their position. If a hedge fund or a private equity investor is doing the former, they would look at assets that have many parts that can be sold to other businesses and investors in order to make them a profit. For e.g. an integrated steel plant has many facilities like electricity making plants which can be used by other businesses. Hence, in this way, if a business is beyond repair and is available at a lower price to them, they will consider buying it. Similarly, for the latter case, they buy assets in which they think they can contribute positively and bring it back to its feet. The ultimate aim is to profit out of the opportunity.