 |
The Pilot's Log Q&A with Alan Thomas of Grant Thornton's Reorganisation & Recovery Practice
 PILOT’s James Wheeler talks over lunch with Alan Thomas, stress equity investor specialist at Grant Thornton’s reorganisation and recovery practice, to find out ‘where have all the distressed deals gone?’
Alan tells us of the mysteries of the current deal climate and how there is always scope for value to be written back by stakeholder deals.
...........................................................
Alan, I know you have an interesting perspective on the market given your broad focus on specialist "stress-equity" investors, interim turnaround managers and the more vanilla PE house investors. What's going on out there at the moment, according to your various contacts?
Well, it's something of a mystery. As we drop more deeply into this recession with the unavailability of new credit, the rapid contraction of demand in key sectors, such as property, construction, automotive, luxury products and so on and so forth - you have to ask yourself -where are the distressed deals? Where are the assignments for turnaround specialists?
So, there isn't as much activity as you would expect?
In recent weeks a number of investors who specialise in backing turnaround projects have made exactly the same comment to me. Essentially, that they would never have thought that they would be struggling to access investment opportunities in times like these.
Is this the same across the board?
No. To be fair, some specialist investors have been busier than others. But, generally speaking, more money is out there than deals in the stress-equity space. There is a lot of frustration and biting -at- the- bit to get things moving.
Where are the deal opportunities? Why aren't they finding their way into the market?
Nobody knows for sure although I think that the speculation is somewhat irrelevant at the moment. One thing that is sure is that at some point in the near future the tide will turn and there will be more do-able deals than there will be investors to do them.
So what does this mean to existing investors? Say, for example, a PE house with a few difficult shareholdings in the portfolio where they have lost enthusiasm for continuing to expend valuable time and money.
It means that there is a short window of time to look at recycling some languishing investments where the shares are currently underwater and the debt-funders are possibly questioning their own position.
But if the shares are valueless, what's in it for the investor?
Several things. Firstly, a specialist investor comes fresh into the situation where the existing investor may have become stale. Secondly, a new money requirement creates a bargaining position against other stakeholders. Value can be written back by stakeholder deals and space created in the shareholder structure for the existing PE house to preserve the prospect for a future recovery.
Why would the incoming investor share value with the existing equity investors?
They won't do it out of gratuitous generosity. But if bound by NDAs, so they can't go around the existing PE house, they will make space if they think the deal is good enough.
And why wouldn't the existing investor do the same deal for themselves?
Well, perhaps they should. But the reality is that investors who really understand turnaround - perhaps including the use of pre-packs and other radical processes - have the particular expertise to see how to release additional value and the experience to be confident in the outcome of a turnaround.
I interrupted you as you explained what was in it for the original investor...
Right - the next thing on the list was this specialist management expertise. Turnaround investors are often very well connected with the kind of big, hairy and scary people needed to get such deals to work.
Are you talking about people like my excellent turnaround manager candidates?
Exactly those kinds of people. In many cases, such individuals are part of the permanent personnel of the specialist investor. They are culturally similar and this is why their attitude towards the risks of the turnaround challenge may lead to a different valuation being put on the opportunity than the incumbent investor would support from his own perspective.
So, what's the problem? What's stopping existing investors from trying out this approach?
At scales of, say, £100m or more, investors are more visible, deals are better understood and there is enough cash moving on the transaction to justify lots of advice and investigation. This is a more familiar area where much of the experience gained and equity investor contacts used in recent years still have a part to play.
And at smaller scales?
Life is very different. It has taken me more than two years to build a base of around eighty specialist investors. And you need a big pool of investors or you simply won't be able to close a deal - time is short, investment interests and enthusiasms are very specific and management capacity is limited. For any decent deal you may only have ten potential investors where the fit as to scale, geography and sector appears to be good. By the time you have explored their appetites for doing that deal on that day you may find you only have a couple of players.
What does that all mean in terms of getting a deal done and preserving some value in a languishing investment?
It means that you need to pursue the right people in the right way. For example, the impression that an opportunity has been very broadly marketed, with a glossy brochure can sometimes be a turn off. The specialist investor wants a deal to feel like it's off-market and exclusive. They want someone to call them and give them a quick sketch of the opportunity, on a no-names basis, if required, rather than send impersonal e-mails. They want to feel like they have a stakeholder partner on the deal that can get them inside and help make it happen.
So, just to recap, there is a population of specialist investors out there with money to invest and a willingness to do deals that could write back value to an existing investor's shares. But you need to treat them in the right way and know enough of the right people to get your deal done.
That's right. Just make sure when taking advice on who to go to that you are speaking to someone who has enough connections with the right investors to give the real prospect of a deal getting done... James, isn’t it about time we ordered some pudding?
................................................................................................................................................
Profile: Alan Thomas, Director, Grant Thornton
Alan works in the Recovery & Reorganisation Practice, specialising in corporate restructure and turnaround. His expertise covers distress-specialist investors, corporate restructuring and turnaround and private equity. With over 10 years' experience as a recovery and reorganisation specialist, Alan manages "ITEx" - the firm's panel of interim turnaround executives. He also has particular expertise in the field of distressed - situation specialist investors, where he maintains relationships with a substantial base of such investors. Prior to joining Grant Thornton, Alan pursued entrepreneurial activities and gained further private equity experience before returning to the profession in October 2006.
Back to Email |
|
|
|
|
|
