THE ANNUAL REVIEW 2010 - PEI Media

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page 88 private equity annual review 2010 a brief distressed debt and restructuring timeline 1978 Chapter 11 of the US bankruptcy code is adopted, creating an effective framework for restructuring companies in financial distress instead of liquidating them 1978 Capital gains tax rate slashed from 49.5 percent to 28 percent; the US Department of Labor clarifies that pension plans can invest in private equity, leading to increased interest in the overall sector 1980 Total commitments raised for US private equity: $600 million 1980s High yield bond market surges on a new issuance basis, with Michael Milken of Drexel Burnham Lambert a major force in the activity; much of the high yield new issuance activity is in support of leveraged buyouts 1989-91 First spate of distressed debt and restructuring deals triggered by the junk bond boom of the 1980s 1989 The Resolution Trust Corporation formed by the US government to help restructure the savings and loan industry creates additional distressed security opportunities 1991 Total commitments raised for US private equity: $7.7 billion 1992 Cerberus Capital Management founded 1997 Asian currency crisis creates many distressed debt and restructuring opportunities in Asia 1997 Oaktree Capital Management raises $1.25 billion for OCM Principal Opportunities Fund II and $1.5 billion for the OCM Opportunities Fund II, the largest such vehicles to date 1997 Klesch Capital raises one of the first dedicated European restructuring funds in the UK 2000 Total commitments raised for private equity: $155.2 billion in North America, € 60.7 billion in Europe and $17.9 billion in Asia 2000 Ripplewood Holdings and JC Flowers lead a consortium to purchase Long Term Credit Bank of Japan from the Japanese government and restructure it as Shinsei Bank in one of the highest profile turnarounds in Asia 2002 The EU Regulation on Insolvency Proceedings is adopted, providing a framework for coordinating restructurings in the EU (with the exception of Denmark) 2003 Two local fund groups – Nordwind Capital and Orlando Management – raise restructuring funds in Germany 2004 Shinsei’s IPO generates tremendous profits for the syndicate that funded the restructuring, though Shinsei later runs into difficulties 2006 Lone Star Funds’ Korea Exchange Bank transaction attracts various investigations by the Korean government upset by the high level of profitability in this public sector restructuring 2007 Largest global recession since the Great Depression commences; fund managers anticipate a strong investment environment for distressed debt and restructuring funds 2008 Fundraising for distressed debt and restructuring funds hit a new high of $51.4 billion 2009 Cerberus turnaround of auto manufacturer Chrysler fails in a massive bankruptcy 2009 TPG Financial Partners decreases its fund size from $6 billion to first $4.5 billion, then $2.5 billion, as changing government regulation impacts the attractiveness of investing in distressed banks 2009 Default rate for high yield bonds hits 13 percent, a new high, though Moody’s forecast for the rate for the end of 2010 falls to 3 percent 2010 Blackstone debt affiliate GSO Capital raises $2 billion for investment in rescue loans, distressed for control and opportunistic transactions 2010 Global corporate default rates fall 44 percent from their 13.5 percent peak in November 2009, according to Moody’s data released in June Source: Probitas Partners, PEI Those that did take the leap did so in some cases with unpleasant results. “A number of groups jumped too early and started buying up bonds and the like in 2007 or early 2008, figuring that we were sort of in the crisis, and of course with hindsight now we now that was just the warm-up to the crisis,” says Josh Lerner, a Harvard Business School professor and private equity scholar. “A lot of those fund investors got pretty badly burned when things turned south in the second half of ‘08.” Likewise, Lerner says, many GPs were also burned because they waited too long to begin making distressed investments, figuring the cycle would continue for at least two to three years, based on historical recessions. Most GPs thought they would have time to adapt and see if things got any worse, he says. “I don’t think anyone anticipated how rapidly the economy – or equity prices – would recover,” Lerner says. “In general I think the private equity industry will regret not having invested more money in 2009.” The snapback in equity valuations affected firms with various distressed investment strategies, including traditional private equity firms that were simply expecting to purchase cheap assets. “I think the anticipation was that we would be in an environment like one of the ones we saw coming out of the ’91 and ’01 recessions, in which we would be able to buy companies at multiples ranging from 5 to 8 times EBITDA – that didn’t happen this time, partly because of the enormous jump in the public equities markets,” Scott Sperling, co-president of Thomas H Lee Partners, told PEI last month. It also threw off-kilter some of the distressed debt investors that look to amass a company’s debt in a loan-to-own strategy. “The average duration is two-and-a-half to three years down into the cycle at the bottom and back up. This one happened in six months – the most precipitous fall to the steepest reestablishment of value is by far the shortest in history,” says one distressed debt firm founder. “If you’re trying to [take control of a company by purchasing its debt] in a ‘V’ of six months, down and back up, you can virtually not accomplish it.” Their firm did take over one company that way, but o therwise found itself in possession of numerous bonds in companies it wasn’t able to take over before markets rebounded. Selling those positions has generated profit, but “you don’t get control of the company, so it’s a booby prize almost”. tomorrow’s opportunties Many distressed investment specialists will now be pulling back from conventional distressed investments, looking instead to realise their portfolios and await the next change in market cycle. “There’ll be a day when things come back,” says one New York-based distressed debt fund investor. “Come back meaning ‘break’,” he added, referring to the economy. In many ways, distressed investment experts see the events of the past two years, and the revival of credit markets, as further building up future distressed investment cycles. n
2010 North America themes 90 First Round: A sideways look at the news 92 Stateside: Shaping an industry 94 M&A makes a comeback 95 Defrosting the mid-market 96 Carrying on 97 Leverage for sale TIAA-CREF’s Schwartz joins Perseus KPS completes $400m in recaps Centre Partners sells Bumble Bee for $980m LPs may flood US mid-market with capital Cerberus to sell Chrysler Pennsylvania commits $75m in re-ups Financial for $6.3bn Clarion nets 25x return on healthcare South Carolina delays direct effort SEC defines venture capital Leonard Green offers $1.6bn for Jo-Ann Stores New Jersey barters carry cut from Tenex NY Teachers’ makes $90m bet on mid-market US industry group replaces spokesman with politico US Senate drops carry proposal in tax bill Chicago Teachers’ to hire first PE consultant Aldus settles New York pension probe PE deal activity picks up in Canada US lawmakers unveil hybrid tax rate for carry BC and Silver Lake reunite for $3.1bn buyout Carlyle in $6.1bn ManorCare asset sale LPs demand focus on operations Clayton Dubilier & Rice closes eighth fund on $5bn
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