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36-43_CoverStory.qxd 4/6/09 5:41 PM Page 37Not one to mincewords, KPS Capital’sMichael Psarosoffers a candid viewof the market.Some deal pros maywant to look away.TacksBy Ken MacFadyenFebruary 2009 MERGERS & ACQUISITIONS 37
36-43_CoverStory.qxd 4/6/09 5:41 PM Page 38BRASS TACKSFFew deal pros wanted to see the bubble that was emerging asfar back as 2006. KPS Capital Partners’ Michael Psaros, meanwhile,may have been motivated to see it. He is, after all, a distressedinvestor. Perhaps that is the reason so many people dismissed hispublic pronouncements at the time that the economy was headedfor a major crash.In trade publications, in correspondence with limited partners,and in conversation, Psaros would make a case as to why the dealmarket and the economy in general were being set up for anincredible fall. It was a convincing argument in 2006; today itresonates like gospel.“We perceivedthis mania,primarily inNew York andother financialcapitals, inwhich peoplehad basicallylost their minds.”Psaros, who co-founded KPS alongside DavidShapiro and serves as a managing partner at the fund,remains pessimistic about what lies ahead for both theUS economy and the M&A market in general. Hedoes, however, like the opportunity set emerging inthe distressed arena, although even there, he is takinga cautious stance.In a candid conversation with Mergers & Acquisitions,Psaros offers a view on how he sees the market shaping upand describes, in detail, how the distressed market willdevelop. Some deal pros may want to read this sittingdown.Mergers & Acquisitions: To start off, I’d like to take youback to a forecast you made in early 2006. At the time,in the middle of what was a tremendous bubble, we werediscussing the possibility of a soft landing for the economy.Your response was that when the downturn comes “itwill be something that hits the economy with great violence.”This was quite a different take than what most punditsand deal pros were saying at the time and for the next24 months that followed. As it turns out, and despitewidely held opposition to this sentiment, you hit the mark.What were you seeing then that allowed you to be so farahead of the curve?Psaros: There were a number of factors. Basically, theworld forgot that there is this concept of risk, and riskmetrics were not being applied anywhere, up and downthe economy, especially in the credit system.We were looking at the deal economy, in particular,and in the M&A markets pedestrian companieswere being acquired at absurd multiples of cash flow.These companies were being levered at levels we hadnever seen before in our careers. That leverage was beingsupplied by hedge funds who were more interestedin clocking phantom carried interest for a particularcalendar year than ever recovering their capital back.So we perceived this mania, primarily in New Yorkand other financial capitals, in which people had basicallylost their minds.This was coupled with the fact that a wide gulf was38 MERGERS & ACQUISITIONS February 2009
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Not one to mince words, KPS Capital's Michael Psaros offers a ...

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