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Credit investors — either by choice or necessity — are turning into private equity investors.

More and more, whether they’re private credit lenders or institutional investors who have no experience owning businesses, they are holding onto the debt of companies who go through a restructuring, and many wind up owning companies they had no intention of running.

This includes distressed debt investors who are comfortable owning the equity of a company post-reorg but have less experience with the management aspect than fighting for the biggest slice of the pie during a restructuring.

We caught up with Jon Weber, who turned his experience as a serial operating executive for restructured companies into the eponymous advisory firm Jon F Weber & Co (”JFW”), to talk about how the evolving nature of restructuring gave rise to his business working with creditors on post-restructuring ownership.

1. Hi Jon, you’re a lawyer by training, and you quickly moved into business. You have had a colorful career in the restructuring world, starting with your role working for Carl Icahn and being a serial CEO for companies Icahn invested in that went through Chapter 11.

From there you carved out roles at distressed debt investing hedge funds Anchorage, Goldman Sachs Special Situations Group and then Elliott Management providing operating expertise for portfolio companies needing turnaround.

Why do you think you gravitated towards this type of work?

At Weil Gotshal, I worked on Latin American debt restructuring when I was recruited to investment banking, where I developed transaction and analytical skills. Later, in my early days working for creditors, I was often a heat shield between management and adversarial former lenders.

I didn’t fully understand management’s challenges until Carl Icahn dropped me in as a serial CEO for post-reorg businesses. Over time, I learned how to diagnose and address recurring operational, talent, and governance challenges when transitioning ownership to creditors.

Helping restructured companies fulfill their potential is the perfect opportunity to blend operational expertise, analytical acumen, and people skills.

Though I have worked on dozens of situations, each brings unique challenges, so I always learn new things.

2. Now, at the beginning of the year, you launched JFW, a specialized advisor where you help identify executives and board members who could best maximize the value of a restructured company. Can you describe your “aha” moment when you knew there was a need for this type of firm?

I have been on the buy side for more than 20 years. During that time, I have filled a gap between the expertise needed to restructure a company and the skills required to improve operations post-restructuring. 

When I led the portfolio operations group at credit funds, other creditors often asked me if there was another “Jon Weber” they could use on their deals, as few firms had an equivalent internal resource. After leaving Elliott, a few creditors asked me for operational advice on their portfolio companies. 

Some sought help with interim management, operational issues, finding specialist consultants, setting executive compensation, or board recruitment. Eventually, these projects evolved into advisory engagements.

I served as an external advisor to creditors, assessing management, helping to recruit boards, designing incentive compensation, and providing operational support. In that capacity, I bring skills that credit investors require to improve businesses when they get the keys.

3. What is a “private equity” mindset?

Great private equity investors conduct deep operational diligence pre-investment and have a thoughtful roadmap to drive improvement as owners. 

When acquiring a company, these investors identify operational improvement opportunities to drive value and achieve an attractive exit. These investors write their exit plan at inception with milestones to be achieved along the way and track the achievement of financial and operational metrics. 

They focus intensely on talent and incentives, building close relationships with management and upgrading where needed. Top PE firms keep close tabs on management and develop deep domain expertise on industry and competitive developments. 

They curate a bench of economically aligned operating executives and industry advisors intimately familiar with their investments. 

Of course, PE investors are not infallible, and many restructurings occur because of their lapses. 

In contrast, credit investors have more names to cover and are constrained by restructuring deal dynamics, compliance, resource, and governance limitations not conducive to deep operational engagement. That said, to the extent practicable, creditors should adapt PE tools and techniques to their post-reorg investments.

4. You've written about “The 7 deadly sins of post-reorg boards”. Can you highlight one?

In their rush to move on from restructuring, creditors hastily appoint familiar faces or rely on advisors to vet board candidates. Without a crisp turnaround thesis, creditors cannot specify the expertise required or may be unable to draw critical distinctions among candidates.

5. In differentiating your service from the AlixPartners/A&M/FTIs of the world you describe this white space where restructuring leaves off and post-reorg board picks up. What is that and how has it expanded over the years?

Consistent with their remit, restructuring professionals overwhelmingly concern themselves with consummating a transaction rather than addressing root causes of under-performance. Upon emergence, they see their job as “done” and get paid at closing.

In contrast, that is when the heavy lifting begins for me. These firms play an invaluable role in managing solvency, liquidity, reporting, and bankruptcy filings but do not typically remediate gaps in management, customer profitability, go-to-market issues, or inconsistencies in strategy – all areas where I focus. 

6. We sometimes see some pretty high compensation and retention bonuses for executives in restructuring. How do you think it’s best to calculate the right compensation for these positions?

If creditors do not believe management is up to the task, compensation will not cure the problem, and management should be replaced as soon as possible. However, when management remains, they cannot be on probation. Do not punish or reward management for pre-reorg performance. 

Creditors should offer performance-based rewards consistent with what an “A” hire would require. Those rewards should be tied to investors’ objectives.

For example, suppose creditors view recovery of par or a modest increase to plan value as a desirable outcome. In that case, they should not grant out-of-the-money or heavily performance-vested options. 

Offer a compelling and achievable future wealth creation opportunity instead of pay-to-stay retention payments. Aim for a pay mix heavily weighted towards attractive long-term incentives offset by cash compensation not higher than market medians. 

Of course, getting management to accept longer-term payouts instead of cash retention is not easy. It takes time to build trust and alignment with management, which are preconditions for a successful outcome.

7. How has direct lending increased the need for your service?

Large hold sizes among direct lenders enable them to get involved quickly when things go wrong. Limited liquidity effectively precludes a new fund from buying a large enough position to drive an outcome.

In addition, direct lenders generally lack operational expertise, and many are not well-resourced to take the keys from sponsor clients. Some direct lenders have sought my help as an alternative to restructuring to improve visibility and access to management. 

A direct lender recently required a portfolio company to retain me to conduct an operational assessment as a precondition to forbearance.

Some direct lenders have sought to engage me as a pre-reorg board member or special committee designee to pave the way for a change in control.

8. Part of your work requires some psychology and motivation for teams who may feel the pains of failure. What’s a key piece of advice when changing the mindset of a company leadership in flux?

Model the behavior you would want from management: work hard, be respectful, and be painstakingly transparent to earn trust. 

Show genuine interest by being an engaged listener; spend time on site, build rapport with management, and prove that you care about their business and management’s future. I counsel investors to appreciate that some members of management may have PTSD from the restructuring and may be too burnt out or jaundiced to play a constructive role going forward.

Understand that this is not just about money: people take pride (or shame) in the success of their company and their team. Focus on the future, not the past.

9. Outside of Restructuring, you’ve been a long-term member of the Council on Foreign Relations. Are we getting more connected globally or more insulated?

Sadly, we are less connected. We have gone from the interconnected trade and investment ideal towards nationalist parochialism. 

Many in Washington and other world capitals disparage internationalism in terms reminiscent of pre-WWII isolationism, which did not end well. Americans seem to have forgotten that strong alliances and an international order are in our national self-interest.

9Questions is our Q&A series featuring key decision-makers in the corporate credit markets. Check out our other interviews here.