Private Equity Turnaround

Discussion of the Private Equity Turnaround Market

Today's economic downturn may lead to an increase in the number of turnarounds performed by private equity firms. In this type of deal, a private equity firm would supply the necessary resources or capital for a distressed company to succeed, thus completing a "turnaround" of the company's performance.

I revisited a discussion published to AltAssets in 2003 with some private equity players that specialize in turnarounds. Although it is five years past, the situation for private equity firms has distinct similarities to today. Most importantly, in 2003 the market was flooded with companies failing presenting many opportunities for private equity-backed turnarounds. Today's economic downturn seems to be presenting similar turnaround targets, making this Q&A very relevant.

Where are the best opportunities?
Jon Moulton of Alchemy Partners explains the basic criteria he uses for a turnaround, "The deals that work for us as private equity players are those in which companies need liquidity to keep going, where there is a business worth saving and where we can get management control." But there are few companies that actually meet these requirements so the market for potential turnarounds becomes very small.

Another opportunity is in companies threatened by China (and India), especially the automotive industry. As the manufacturing process is outsourced to China by many U.S. and European automakers they fall into distress with excess workforce and resources. This could be a great position for a private equity firm to cut the company to the bone leaving a more efficient company with only what is necessary to survive.

What would you not consider for a turnaround?

Jon Moulton says, "We wouldn't do a large contracting turnaround. We have had no success in those and neither has anyone else. They are fundamentally feeble businesses, you never know the depth of the hole you are puttying money into and then the money at the end is usually pretty slight. I am also very suspicious these days of manufacturing. These businesses are swimming against the tide and they often have large pension and environmental liabilities. We are looking at some turnarounds in which the key issue is a dramatic restructuring to get rid of pension liabilities. It's brutal territory and a very unattractive activity for anyone to be involved with."

Again, the threat from Asia means that heavy industries are not great opportunities because countries like China can manufacture so much more cost-efficiently than Western countries. So companies focused in manufacturing industries are less attractive for a turnaround than say, the services industry, because that work cannot be outsourced abroad as easily.

Gary Klesh has several industries he is staying away from, " I wouldn't touch pharmaceuticals and other industries that are heavily reliant on research and development. I won't go into business that are reliant on the skills of particular people, services such as advertising agencies and consultancies. We are also staying away from the construction industry. But we are in negotiations with companies in all other areas that are quite sick."

What are your main obstacles?

The most obvious obstacle is labor laws and protections against downsizing companies. This is a key way in which to trim the budget and many distressed companies do have a lot of excess personnel. Moulton makes an especially relevant coorelation to today, "The not so obvious obstacle is trying to restructure when you have a sick banking system around you. It's very tough dealing with banks on a day-to-day basis - they are shell-shocked and can't make decisions." Banks that are reluctant to work with risky companies make it all the more difficult for a turnaround.

Turnarounds are not always attractive to managers so one challenge "is finding the right people. When we turn around a company, we set the strategy but we don't get involved in the day-to-day management of the business; we find other people to implement that strategy. It is very difficult to get these people. As you can imagine, turnarounds are a lot of work and there is a lot of pressure involved - it's not always an easy sell to managers."

	Jon Moulton, managing partner of Alchemy Partners, a specialist in turnarounds and public to privates in the UK
	Gary Klesch, chairman of Klesch & Co, which specialises in investing in European companies in need of restructuring
	Ollivier Lemal, directeur general of Plantagenet Capital, a US and European firm that makes early-stage venture, strategic buy-out and turnaround investments

The future of private equity turnarounds is not clear but there are more and more companies facing insolvency and private equity investment could be the best solution for filling that capital gap. Additionally, many firms need superior executives at the helm in such difficult times and private equity groups often provide management that is experienced and capable of making the changes necessary for survival.

Here is the full discussion from AltAssets


Tags: Private equity turnaround, private equity distressed, distressed private equity company, private equity turnarounds, private equity investment turnaround, private equity distressed debt company, Private Equity Turn Around, private equity investment turnarounds

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