Women in Credit: Jamie Zimmerman

Jamie Zimmerman is a legendary investor. She started her investing career in the early 80s and has seen it all: from double-digit interest rates, to the great financial crisis, to the current paradigm shift in the debt markets. Her firm Litespeed Partners was a trailblazer, launching in 2000, as one of the first woman-owned hedge funds. Many of her predictions have come true through the years.  So, why has she decided to hang up her shingle managing hedge fund monies after such a successful career to focus on her own family office and relaunch in a different structure? What lessons has she learned? Jamie candidly shared her experience and opinions with Contributor Rachel Albanese below.

Rachel Albanese
Jamie, thank you so much for talking with me today. I have heard your name so many times over the years since I first started in the business, and it’s an honor to talk with you today. Why don’t you tell me about your career trajectory and how you got to where you are today.

Jamie Zimmerman 
I was thinking about what’s going on in today’s restructurings and it’s as if I have come full circle in my career.

When I went to law school, I wanted to be the first woman on the Supreme Court. Sandra Day beat me to it, but during my first summer, I worked for a Supreme Court litigation firm. I was assigned to the Democratic Reapportionment case for New Jersey, and I thought, “This is exactly what I was put on the earth to do.†The standard was “reasonable representationâ€:  like pornography, “you know it when you see it.†It was so loose and vague and left one totally beholden to the judge’s opinion.

I wanted to be right or wrong about something. I wanted to learn a set of rules and apply them to find the right answer. I stated my second-year summer at Stroock in the tax department, but they tried to convince me to be a litigator. They paired Danny Golden with me and kept putting me in the bankruptcy court. There was a Code (it was 1983, so the ’78 Code was fairly new) and the bankruptcy lawyers were doing everything: their own litigation and their own negotiation. They were a sort of a jack of all trades lawyer under the umbrella of the Bankruptcy Code.

I clerked for Bankruptcy Judge Buschman who had a very strong sense of right and wrong. But, after that, I realized law was just not for me. I was more comfortable putting my neck on the line. I polled my Amherst classmates at our 5-year reunion, and, at that time, despite the many doctors, lawyers, and investment bankers, nobody was really having fun except for my friends who were trading bonds. They alone seemed to have good work life balance, while having a lot of fun and making a lot of money.

So, I tried to get a job in sales and trading, and I was fortunate enough to be hired by Michael Gordon in the risk arbitrage department of LF Rothschild before it became Angelo Gordon. I found that my job was to be somewhat of an investigative reporter, but instead of writing an article, I put on a trade. I got lucky. It was really fun. I enjoyed going to work; I was both a bankruptcy and arbitrage analyst. Usually when credit is easy, you focus on arbitrage and when it gets tight, the buyers who have taken on too much debt go bankrupt and restructure. Until three months ago, I was still doing the same thing.

Rachel Albanese:
What are you doing differently now?

Jamie Zimmerman:
Coming into 2023, we anticipated that the rise in interest rates and the decrease in the availability of bank credit would create opportunities for us to profit by buying distressed debt. We grew our cash position to take advantage of what we predicted would be rolling waves of corporate refinancings, but over the course of 2023, we were slow to deploy it, given the prevalence of creditor-on-creditor violence. Further changes in the landscape have led us recently to decide that we need a different type of vehicle to take advantage of this cycle.  A locked-up vehicle would enable us to maintain and profit from a diversified portfolio during extended holding periods and to better control the allocation of risk.  Instead of buying distressed or defaulted debt and swapping it for cheap equity, we see profit opportunities in buying entire operating subsidiaries or assets from these structures. Private equity funds will eventually need to deleverage these corporate entities, and spinning off and selling divisions is one way to raise the necessary cash.

Rachel Albanese:
That sounds exciting! So, what would you say has been the key to your success and your longevity in the business?

Jamie Zimmerman:
I love investing, learning and researching the transactions. Intellectual curiosity and an open-minded assessment of what is happening.  I tell my children, that in order to be good at a job, you have to like what you’re doing. You have to find something that is so much fun that you could see yourself doing it for free so that your efforts do not feel like work.

Rachel Albanese:
Yeah, that’s definitely the key to longevity in any job.

Jamie Zimmerman:
I think it’s the key to success. I really don’t think you could fake joy in a job if you don’t have any.  It’s so much fun to invest in the event space or what I used to call “how much and when investingâ€: how much are you going to get and when is so great because you could think something’s cheap in the market, but whether it gets priced more expensively or not, what multiple people pay for, is out of your control. Where interest rates are is a little bit out of your control. If Microsoft is in contract to buy Activision for $95/share, and they can get approval, that’s what you’re going to get. So, when you see Activision trading at $74/share, you can make some sort of analysis as to what the chances are you’re getting $95 and whether the return is a good risk reward over the time period.

There’s more science to it than just being a value investor. We thought of ourselves as value investors with an event overlay. Bankruptcy investing is another one of these events. You buy one thing and then you’re going to get a package of other things, you’re either going to get cash or new bonds worth something or a package of cash, bonds, and equity. And you ask the same question, how much are you going to get and when.

Rachel Albanese:
How has bankruptcy investing changed in recent years?

Jamie Zimmerman:
I think the bankruptcies have completely changed. A couple things have happened.

Number one, when I started, there was a bifurcation in Wall Street between debt and equity. You were either a debt analyst or an equity analyst, and people really didn’t understand how to do both which created a great amount of inefficiency in the price of distressed securities. Over time, that’s changed. People now understand that debt turns into equity.

Number two, when I started, every company had a bank and their interest in these early restructurings or Chapter 11s was to be the bank on the other end, and they cared very deeply about the credit quality of the loans that they had made. The banks kept their loans on their balance sheets and worked with other banks who would continue to be in their syndicate group to help the company get out of Chapter.  Post the fall of Lehman, the government didn’t want banks to take risk. So, banks don’t own debt anymore. These loans are now owned by CLOs, and they don’t have the same team approach. They’re not necessarily on the side of the company, they don’t have a long-term view about being the bank for the company, and they don’t have any allegiance to each other either. The banks worked together; the distressed investors in the days of pro rata distributions and strong covenants were on the same team and talked about how they were going to fix the company to benefit all.

CLOs seem to now work together to jump in front of other secured lenders and wrest value from other CLOs. Without strong covenants, creditor on creditor violence has spawned inequitable, non pro rata distributions.

Rachel Albanese:
Tell me more about how the investments are different now.

Jamie Zimmerman:
As an investor, you could be a value investor with a better security, protected by a strong indenture and collateral. You had a security that protected your interest. It was certainly safer to buy a secured piece of debt and expect to get equity. If you didn’t get your coupon or money back at maturity, you’d take the company into court and you would get paid. You could get the real estate, the art on the wall, and the equity. The risk reward was very, very attractive. These days, most secured paper in the public market has terrible covenants.  Not only are you trying to invest and get a piece of a company that hopefully you’re going to revitalize coming out the other end with better management or better capital structure, but you are looking over your shoulder to make sure that someone isn’t taking away the collateral that you thought was yours.

We were involved in Revlon. What is the value of a make-up company other than its brands? You’re going to take the brands out and call them BrandCo and lever them up away from the secured creditors and tell them they never had a security interest in that collateral. You’re kidding me. It’s akin to going to Chase and saying, “Hi, I’m Rachel. I’m going to buy this house in the Hamptons,†getting a mortgage and then realizing you want to put a tennis court in the backyard and don’t have any money. So, you go to Deutsche Bank and you say, “I’d like to borrow against my kitchen for my tennis court.†Deutsche lends you money and Chase goes, knock, knock, knock, “Rachel, what’s that? We are the mortgage owner in your house.†And you say, “Yes, I just took a loan against my kitchen.†And they say, “Wait, we’re the lender on the kitchen. And you say, “No, it doesn’t say kitchen in the document, it just says house.†Chase says, “Wait, every house has a kitchen!†It’s sort of a joke, right? A contract is supposed to describe the deal that’s being struck. But that’s not what’s going on now. Someone might lend as a secured creditor and because of some interpretation of the words of the indenture, they lose their collateral and wind up with something that is not what they bargained for.

As Humpty Dumpty said, words can be interpreted and misinterpreted in any way someone wants. The judges should stand up to this. Bankruptcy courts are courts of equity.

Rachel Albanese:
What do you say to the argument that the company has the fiduciary obligation to engage in these kinds of transactions to lengthen its runway and increase liquidity?

Jamie Zimmerman:
I just don’t see how that system works when it’s based on trying to abrogate contracts. I understand the letter of the law, but the courts should do the right thing. I really am shocked that the courts have not been up in arms about drop-downs and uptiers.  Perhaps there is more pressure to get the cases through, rather than adjudicating them in the right way.

Rachel Albanese:
How has all this changed your view of the distressed investing business?

Jamie Zimmerman:
Things have come full circle for me. I didn’t like the vagaries of court when I started out. That’s why I stopped being a lawyer. Now everyone’s just trying to cheat. If there’s not a willingness to enforce a contract to mean what everyone understood it to mean when it was written, it’s creditor warfare.

The bankruptcy code is a mechanism so that people can be treated equally. The whole policy behind the code was so that you could have an automatic stay and you could look at the assets and people would have their fair share of what is left so that you couldn’t just pay some creditors over others. Look where we are now. 

I don’t think there’s anything good about the world when some implied covenant of good faith and fair dealing is sort of thrown asunder in the name of the words. What do the words say? What about the underlying bargain that was struck? People seem to have decided that it doesn’t matter. And the courts, regardless of being courts of equity, are sticking to strict construction. I am shocked. No matter how good your lawyering is, there’s some other lawyer who’s going to interpret it another way and some judge who will interpret their way.

The private equity people are now the equity holders and the CLO manager. They do not want to liquidate or file bankruptcy or give up control of the entity.  As a creditor, you don’t really know which side you’re going to wind up with, and whether you’re going to wind up underneath a bunch of other debt without your collateral, or whether you’re going to wind up in the group that is prioritized.

That’s not really investing but litigation warfare. It’s been going on here and there for some time, but without banks and with toothless covenants, half of one’s day as a distressed investor is spent looking for the bomb shelter rather than analyzing how to take each company out of Chapter with the best structure and management to thrive in the future.

For the moment, companies are coming out of Chapter too levered. Who wants to own any of these things? The move to deleverage has been put to the side in the name of kick the can down the road. Many will need to refile. 

Rachel Albanese:
You’ve been prescient in your investments over the years. I was looking back at some of your earlier quotes, and for example, in 2005, in a Wall Street Journal article, you anticipated correctly that there would be consolidation in the airline industry, the death of Kodak, the eventual demise of Rite Aid, and other things. And then again, in 2022, you predicted correctly that the SPAC situation would implode. What tipped you off? How did you know that SPACs were not going to continue the same way that they had in 2021 and 2022?

Jamie Zimmerman:
You could see toward the end, the SPAC projections were insane. They looked like crazy hockey sticks based on nothing. That always happens at the end of a cycle. Bankers are selling debt or equity or a company, a banker is not an investor.

Rachel Albanese:
What gives someone an edge when they are analyzing what is going to happen in a company or industry?

Jamie Zimmerman:
Obviously one of the most important things is competitive landscape. From the company’s perspective:  How do you make your money? Who’s paying you? Why are they paying you? Are they going to keep paying you? Does the client or customer need to buy what you are selling them or is it discretionary?

Who is showing up and doing what you’re doing better or doing what you’re doing worse? What’s the cost structure of your business? We always thought of ourselves as value investors with an event overlay. We didn’t do anything different from anyone else who analyzed a company.

Are there moats to your business? Do you have a supply of what you need that you’re getting at an inexpensive price?

One of the things I always teach the people at Litespeed to focus on is the people. The motivation of management is everything. If you see how someone’s paid, they will generally do what you would expect them to do as motivated by their payment structure. If they’re paid when the company is sold and they’re not paid when it’s not, well, they will go sell the company. If they get paid to increase the EBITDA of the company and they don’t get paid really to just blow it out to someone else, well, that’s what they try to do.

Rachel Albanese:
We’re doing this in March, which is women’s history month, so I think I should note that not many women run hedge funds. What has been your experience in that respect, and how has it changed from when you founded Litespeed in 2000?

Jamie Zimmerman:
It used to be the understanding that if you had a kid, you’re going to be out of the workforce. I think that has changed. So that’s a big deal. I think women now are allowed to talk about having a family without being marginalized. In 1995, I asked to run a fund investing in post-reorg stocks. I was pregnant at the time. I knew that if they found out, the firm was not going to give me the money. So not only did I keep it a secret, I didn’t even tell my mother I was pregnant because the head of the firm was a neighbor in my mother’s community. I called the fund the JZ equity fund so when they found out I was pregnant, they wouldn’t say it was Bill’s fund. When they did find out I was pregnant, one of the owners of the firm came over to the trading desk and asked me if it was a mistake. I hope that wouldn’t happen today.

There are many more women in business school. There are more women in law school. The more women that are in business school, the more women are going to be on a trading desk. It’s going to all follow, but it’s been slow. All that being said, I know that one of the large investment banks on their summer outing in a department where they had one woman, they played touch football. And that’s recent.

And in another example, about three years ago, I got invited to a women’s golf and tennis day for a major investment bank. One of the guys from the bank was wearing a hat from one of the great clubs of South Hampton. I said, “Oh, are you a member of so and so club?†And he said, “Oh, no, we had our outing there yesterday.” And I said, “I played there last week.†He said, “Oh, then I’ll play with you today.†So, the next year, they have the outing again, and they ask me to come. And I said, “Well, where is it? Because you had the men’s outing at so and so club, and you had the women’s outing at this bullshit club.†So I told them, I’m not going unless you have the women’s outing at a commensurate golf club. And they didn’t. And I didn’t!

But, in general, it never occurred to me that I was a girl when I was working. It just never occurred to me. I was just doing my thing. And I remember interviewing at a large firm, actually, and having a woman close the door and say, I guess you want to know what it’s like to be a woman at this firm. And I was sort of flabbergasted. I actually wasn’t thinking about that. It never occurred to me to ask that.

Rachel Albanese:
Any closing advice for junior investment professionals—male or female—about how to succeed?

Jamie Zimmerman:
I have always believed that playing sports was very helpful in preparing oneself for the working world. I think if you play athletics as a kid, you realize that it’s not about winning or losing, it’s about getting up after you lose competing and playing again. If you lose the game, you could win the match. You have to just get up and keep going. Dust off after the failures, learn from them and take them in stride. You have to be comfortable losing and experiencing the agony of defeat so that you can go on to taste the thrill of victory. 

Growing up, my dad coached all these sports teams between fourth to eighth grade. And at one of our high school reunions, at least four women came up to me to tell me that my dad sort of changed their lives because their fathers didn’t think sports were very important for girls. But my father obviously did. I do think there’s a lot to that.

Rachel Albanese:
That’s a great metaphor for business and a good note to end on. You have to keep going despite having losses along the way, but ultimately, you hope that the wins outnumber the losses.