Distressed Investing – How To “Paper’ A Deal Without Committing Light Treason

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During his recent interview with Tobias, Thomas Braziel, the Founder of 507Capital, discusses how to ‘paper’ a deal without committing light treason saying:

Thomas Braziel: In the area we work in or I work in, I feel like the hardest thing is papering stuff. People will say things, ‘How do you get comfortable with this transaction?’ Being like, ‘Well, we do it through spending, first, our whole lives trying to paper stuff and figure out how to paper is securely. Also, months and months on a deal is basically figuring out how to paper it so that you’re secured. Not secured in the secured debt sense, but secured in the sense of there’s no slippage between what opportunity or exposure you want and just having a papering bumble so if somebody walks off with your money or something.’

Thomas Braziel: Yeah. I read an FTE. I was surprised. I was like, ‘I know people do this stuff.’ I should say this one thing. When I was running the capitals, it’s quite a small fund, so once I pulled myself up, we were kind of working for larger distress firms and hedge funds. I don’t know if it’s a scary secret, but one of the funny secrets about distress is most of these guys find stuff through other means, right? There’s always brokers and stuff. Sometimes we’re working for some very large and well known people. So, I started sniffing around Mt. Gox and I was like, ‘I know people that broker this stuff. They don’t know what they’re doing. I’m going to look at this.’ So, I started looking at it. Was able to paper a transaction, took a minute to do.

Tobias Carlisle: What does papering mean?

Thomas Braziel: Papering is like, when you buy a stock, it’s all figured out for you. You don’t have to do anything. You’re just like, ‘Boop. Okay, that was easy. All right. Lunch time everybody. I decided to buy some stock today.’ When you’re buying a claim or you’re doing something in the private market sector, you have to paper the whole thing. Papering is the contracts, right? The agreements.

Thomas Braziel: For instance of Mt. Gox, we weren’t really sure how to paper it, we had to make sure we had enough escrow, what does the contact need to say, what are the representations of warranties in the contract, how do you actually transfer the claim. It’s Japan, everything’s in Japanese. Luckily everything’s in half English and half Japanese, or it’s in both, it’s in dual language. I was able to get it done and work through that. That in of itself is super valuable for these trades, knowing how to construct and manage that risk is part of the transactions you’re doing. Maybe no one’s done a deal in Latvia, maybe no one’s done a deal in Poland or of this kind of transaction. Maybe there’s transferability issues and you need to figure that out or how to work around it. Maybe there’s US law sanctions against doing it and you need to find ways that are totally legal. It’s a paper.

Tobias Carlisle: You don’t want to commit any light treason.

Thomas Braziel: Yeah. Light treason, I always like that phrase. Might of been a little bit of light treason. Is there such a thing?

Thomas Braziel: It’s real. You need to spend a lot of time on that and that’s, not the majority of the time, but I would say that that’s where the real creativity comes in. If you worked through the analysis of a workout, because that’s what these really are, all these kind of things are really a lot of them are workouts. You’re like, ‘Oh, my God. That’s it. That’s so simple.’ You’re like, ‘Yes, of course its simple because I’ve done all the work for you and you ain’t got to be able to paper it and manage the risk of transferring with it and transacting in it.’

Thomas Braziel: Also, you have to be able to source it, the whole sourcing is a real thing. Again, you can’t call fidelity and be like, ‘Buy me some’… I don’t know.

Thomas Braziel: Yeah. You have to be able to source it and the sourcing is a big part of it. The sourcing and papering are harder than the actual analysis, I think.

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