Distressed Debt

When a German politician referred to hedge funds as "swarms of locusts raiding our German companies," he was playing to the political landscape and widespread fear in Germany of foreign owners and layoffs, which often result after a buyout as a way to reduce bloated cost structures. Although, not his intent, there is an interesting thought to consider here. In a distressed situation, hedge funds will buy debt of a struggling company and swap debt-for-equity to gain control of the company. Hedge funds then might call for management to make difficult (read: apolitical) 'cuts' in order to rebuild an inefficient organisation upon a stronger foundation.

Admittedly, nothing good ever came from locusts, so perhaps a better analogy would be that of a fire, which can destroy a decayed forest while simultaneously planting the seeds for future healthy growth. Of course, we know that equity and debt investors do far more than 'clear-cut' in terms of capital raising, strategy and developing new business relationships. With new political leadership in Berlin ready to embrace outside investors in ways not before seen, the opportunity has never been greater for foreign investment. In particular, the passage of the German Investment Act and the Investment Tax Act in 2004 - making it easier for institutional investors to invest in hedge funds and retail investors to put money in funds of funds - has loosened the rules governing hedge funds.

The bare facts