I started out as an investment banker, but quickly switched over to working as a credit analyst for a hedge fund. Although I wasn’t looking, when I stumbled across the opportunity and was given the chance to leave investment banking, I jumped on it. Lifestyle was by far the biggest driver of my decision. I worked as a credit analyst for 5 years and thoroughly enjoyed my work. I spent time on the cross-over space (companies on the verge of junk/investment grade) and also purely in high yield. Credit analysts end up covering the same companies as the equity analysts, but spend almost all of their time on different things.
Credit investors’ greatest risk is not getting paid back. They aren’t nearly as focused on earnings or the income statement as a whole. The top priority as a credit investor is to understand the balance sheet and cash-flow statement. Credit analysts also find themselves working on unique and complicated situations that the equity analysts often avoid. This includes restructuring, asset sales, and joint ventures. It requires hours of mindlessly reading through bank covenants and other financial documents which most equity analysts don’t have the time to do. In order to predict cash flow, you still have to be able to predict revenue, so you do spend a decent amount of time on revenue and costs too.
After 4.5 years, I really wanted to make the jump to the equity side. My firm didn’t invest in equities, so I knew I had to jump ship in order to pursue my goal. The switch was harder than I thought, mainly because my stock pitches weren’t as good as they needed to be. People referred to them as too “safe,” which made sense because I was a credit guy. Eventually I found someone with a financials focus who really liked my background. We immediately hit it off and I was given an offer. Financials teams like people with credit backgrounds because most financial companies take credit risk, and most equities analysts don’t understand credit risk. Many financial companies are heavily regulated, so there is an enormous amount of data to go through, similar to the work of a credit analyst. A lot of equity portfolio managers say they love people with credit backgrounds, but the truth is credit analysts just think differently than equity analysts, so the fit is usually off. Credit analysts are safe and think about the downside first while equity analysts focus mostly on the upside. In the end, I am very happy I made the transition to the equity side, and I think my background has really given me a leg up on the competition. Bad things happen more often than you think, so I’ve learned survival is just as important as growth in these volatile markets.