Jose D. Roncal
You’ve probably read all the flack over this week’s cover on Newsweek magazine—”The Recession is Over,” with an added footnote reading, “good luck surviving the recovery.” The message implies that leading indicators say the recession is nearing an end, but that the recovery is likely to be a long slow process.
End of Recession or not, there are still plenty of distressed businesses that are teetering on the brink of collapse. With my years of experience as a transformational and corporate turnaround specialist, I’ve noticed that those possessing similar skills are suddenly in high demand and positioned to ride out this perfect storm. In fact, I can’t recall a time when these services and expertise were in greater demand.
Even as the economy tries to recover, we are still facing tight credit markets and bankruptcies continue to rise. Private equity is turning its back on traditional leveraged deals and looking toward investing in distressed companies.
I believe that many of the private equity deals that occurred in 2006 and 2007—those with weak covenants and too much debt—will go belly up in the next few years. How will it all play out? Cash usually isn’t available to leverage these kinds of distressed situations and with the lack of bankruptcy credit, I predict that many of these restructurings will take place outside of bankruptcy court and end in rapid liquidation.
It is easier to do an out-of-court deal for a company that only has one or two major lenders versus one with widely syndicated credit. The sheer volume and complexity of these deals makes it virtually impossible to navigate through all of the court system’s cases in a reasonable amount of time. That translates to ample opportunities for turnaround specialists.
But turnarounds are not like traditional buyouts where the companies still have positive cash flow, so these opportunities are fraught with huge challenges. Most of the distressed companies have CEOs and top management execs that aren’t up to the task and need to be replaced with new capable leadership. Sometimes it requires a total housecleaning right down to the floor managers.
Then there is the problem of determining value given the fact that prices have fallen, and since there are no crystal balls, nobody knows where the bottom lies. Turnaround specialists must be both big picture visionaries and sticklers for accounting details.
Falling product and services demand is another problem. Vendors are no longer willing to give customers extensions on credit. For instance giant Circuit City went down surprisingly fast because vendors pulled the plug.
The whole equity industry has undergone some dramatic shifts. In the recent past, high-risk takers like hedge funds would simply step in and buy up the debt from troubled companies. Those were quick short-term solutions that didn’t end well. For the time being, those risky-fix days are over.
I believe that the future of private equity finance will be more focused on the long term—with an investment horizon of five to eight years rather than the previous three to five years. Banks are having to exercise more patience now because even if we see an economic recovery in two or three years, the after effects of the downturn may take five to seven years to work it’s way back to complete equilibrium given the weak financial markets.
There isn’t a lot of good news in this recession, but it does tend to eliminate the weakest of the private equity firms and leave greater opportunity for those that survive. There will be fewer players in the long run, and more opportunity for highly qualified people that specialize in turnarounds.
When I’m not engaged in corporate restructuring and helping companies get back on their feet, I’m busy writing about the economy and a wide variety of financially related matters.
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