Martin Whitman reminded an executive conference yesterday why he has become one of the most prominent investors in the field of distressed markets. “In distress investing, Chapter 11 is not an ending,” he said. “Rather, it is a beginning.”

The legendary founder and chairman of Third Avenue Management LLC led off a full day of panel discussions and lectures at the Argyle Executive Forum, which centered on what has become one of the hottest areas of both the private equity and hedge fund investment arenas.

To make a killing off distressed corporate entities, Mr. Whitman recommended an intimate knowledge of Chapter 11 bankruptcy procedures and a willingness to be patient in dealing with onerous reorganizations.

To those investors who have scrutinized bankruptcy laws and accurately anticipated mass tort actions during the past few years, the general outlook is that distress investing will continue to present some enticing opportunities in 2007. But, like any other investment fad, large conferences on the topic are signs that enough competitors have heard about it to make finding those opportunities ever more challenging.

The current influx of liquidity into this area doesn’t exactly bode well, either. Most experts on distress investing agree that the best opportunities present themselves when investors begin to withdraw from the market.

Distress investing begins with companies that have flopped because of bad managers, bad balance sheets, or a combination of both. It uses bankruptcies and sweeping corporate reorganizations to make handsome profits off the misfortunes of poorly run entities. “This is a high ‘beta’ business,” Mr. Whitman said with just a hint of sarcasm.

Of course, distress investing counts on money defaults. And it is vital to remember that no one can take away even a subordinated creditor’s right to a money payment, unless, of course, there is Chapter 11 relief.

A case in point is the airline bailout of late 2001. The Senate approved, with a vote of 96-1, cash payments totaling $5 billion to a struggling industry. During the next year, about $2 billion of that went toward paying down cash interest on outstanding airline debt. So none of those billions went to boosting airline security procedures in the wake of the terrorist attacks of September 11th, 2001. “It seemed to be a bailout of airline creditors rather than a bailout of the airlines,” Mr. Whitman said.

For all the self-described “home runs” Third Avenue Management has hit in the past, including Mission Insurance, Anglo Energy, and KMart, not once, but twice, Mr. Whitman said he and his colleagues have faced just as many disappointments, including Herman’s Sporting Goods and Fran’s Nurseries.

“Our strikeouts have involved misidentifying who it is we think will be the senior issue to take part in the organization,” he said. “The way we approach distress investing is similar to how we would approach common stocks. It’s all about which senior issue we think will do best.”

The parallels between distress investing and leveraged buyouts are tempting, according to Mr. Whitman. In both instances, it is important to determine the value of the business before the cost of capital. “In an LBO, you leverage up. In distressed situations, you leverage down,” he said.

“With distress investing, you’re making a sick company healthy,” he said. “With an LBO, you’re making a healthy company sick.”

The nature of bankruptcies and reorganizations in America has meant providing for armies of lawyers and bankers dedicated to substantial — and highly billable — man-hours.

“Don’t be angry: Creditors of distressed companies are going to be ripped off by investment bankers, lawyers, and managers,” Mr. Whitman said. “Whether it’s a Chapter 11 reorganization or even a Chapter 7 liquidation, companies usually pay all the professional expenses. It’s the only area where the norm is for the company to pick up those expenses, no matter which side the professionals represent.”