THE ANNUAL REVIEW 2010 - PEI Media

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PRIVATE FUND COMPLIANCE FORUM 2011 THE ROAD AHEAD May 3-4 | 3 West Club, New York The second annual Private Fund Compliance Forum comes at a critical time for compliance professionals. With the recent passage of the Dodd-Frank Act, the private equity industry is facing a transformational event that will change the scope of how GPs manage their firms. This year’s forum will focus on how to implement and manage an effective compliance program amidst this new wave of regulations, as well as provide a comprehensive update on other key global tax and regulatory initiatives that could change the way you do business. As the SEC increases its focus on the private equity industry more than ever before, ensure that your firm stays abreast of compliance matters. Hear from our distinguished speakers including: www.peimedia.com/compliance11 Book your place today: Online www.peimedia.com/ compliance11 Email nicole.w@peimedia.com Phone +1 212 633 2905
private equity annual review 2010 pa g e 87 Slim pickings d i s t re s s e d i n v e s t i n g What happened to the feast of distressed investment opportunities expected to flood the US and UK markets? Amanda Janis reports Take a trip through the PEI archives back to autumn 2006 and you’ll be reminded that private equity distressed investors were beginning to rub their hands in anticipatory glee, noting that the boom cycle’s high valuations, excess liquidity and low interest rates couldn’t continue in perpetuity. Indeed, one year on, the term “credit crunch” was beginning to appear regularly in our pages – but no one was prepared for the severity of the global economic crisis that was to unfold over the next two years, causing large financial institutions to collapse, stock markets to plummet and the entire global financial system to be called into question. The severity of the crisis – and the subsequent responses by banks and central governments –dampened a lot of the anticipatory glee. Josh Wolf Powers, founding partner of New York-based turnaround and restructuring firm Blue Wolf Capital Management, has been predicting an avalanche of opportunities related to distress for nearly five years. He’s still waiting for the wave of conventional distressed opportunities, he says. “There just has not been the avalanche of companies in the US filing for Chapter 11 bankruptcy protection,” Wolf Powers says. “And when they have filed for Chapter 11, they’ve typically been far further gone, so the Chapter 11 has resulted in a liquidating [Chapter] 7 or has been a reorganisation opportunity available primarily to the lenders, to the senior creditors or secured lenders.” That resulted in a number of distressed debt specialists like Oaktree Capital Management, Anchorage Capital Partners, Towerbrook Capital Partners and Wayzata Investment Partners taking over companies (often from private equity firm sponsors), but Wolf Powers says “even those opportunities haven’t been as numerous as anyone imagined”. banks and bailouts “Things that are good for most investors, and most citizens” aren’t so wonderful for those hoping to find distressed investment bargains, Howard Marks, chairman of Oaktree, wrote in PEI’s recent book, The Definitive Guide to Distressed Debt and Turnaround Investing. Thus various government bailouts and stimulus packages over the past two years – which one veteran distressed investor dubbed “the socialist bailout game where the consequence of taking absurd risk was forgiven” – have helped restore confidence and revive credit markets, but suppressed the supply of distressed investment opportunities. However, it’s the actions – or rather lack thereof – of lenders that industry insiders most frequently pointed to as a principal reason why the expected plethora of distressed investment deals didn’t quite come to fruition. “Lenders – in particular banks, but also hedge funds and other non traditional lenders – chose rather than to exit their uneconomic holdings, to essentially ‘live to fight another day’ by neither admitting defeat nor funding continued investment,” says Wolf Powers. Reeling from mortgage-related losses and caught out by the suddenness of the downturn, many banks hadn’t taken reserves against corporate loans that should have been marked down and become distressed investment candidates, says David Blechman, who in August 2009 left Sun Capital to join distress- and turnaroundfocused Tower Three Partners. “If it’s on your books at par, you’re not going to transact on it. You have to mark it down first,” he says. “So in late ‘08 and the first part of ‘09, a lot of those lenders just weren’t willing to do anything yet. And meanwhile, to the extent that it was [private equity and hedge] funds holding the bank debt, more and more of those funds were willing to own the company,” Blechman says. “So there were far, far fewer actual distressed private equity control buyouts of these companies as a result of those two things.” The situation has been the same on both sides of the Atlantic. And while many lenders in Europe increasingly started to divest some of these assets in the latter part of 2010, industry participants say they weren’t likely to attract many true distressed investors now, either because the assets were no longer “distressed” given the market rally seen in the first part of 2010, or because they’ve essentially become “zombie companies” while sitting on the banks’ balance sheets. timing it right Before the subprime crisis fully hit, distress hadn’t really begun to manifest itself save for in certain sectors like those related to housing. “So there were some opportunities there, before fall 2008, but it was all complicated by the fact that you had no visibility as to what the future was likely to hold with respect to that sector,” Wolf Powers recalls. “You saw that you were on the edge of a cliff but you didn’t know how high the cliff was or how fast you were going to fall. So that made it very hard to invest in that situation.”
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