Private equity to take on distress

The UK is now home to a quarter of the distressed companies in Europe and that figure is set to grow according to many industry experts. Research from independent corporate advisors Close Brothers Corporate Finance (CBCF) recently revealed the UK also holds the top position for leveraged buyouts, more than doubling that of France.

Things seem pretty dire for many UK companies at the moment. Companies are breaching their covenants and while the percentage of distressed companies in the UK has actually fallen from 30% to 25% in the past year, GPs do not believe this is a sign that the number of distressed companies is falling but is rather an indication that the problem is becoming more widely dispersed in countries like France and Germany. “The UK was hit hard early on but France has recently seen a downturn,” says Gareth Davies, managing director of CBCF.

So the question begs to be asked, what are private equity firms doing to take advantage of these distressed companies? The answer – many have already begun recruiting restructuring specialists to take advantage of the market. French private equity firm Butler Capital Partners has hired Lise Nobre as partner to strengthen its distress and special situations team. Turnaround advisory firm Alvarez & Marsal has begun a very aggressive recruitment drive in 2009 and has so far hired 17 executives to capitalize on the distressed market. And most recently, US buyout firm HIG Capital and its debt affiliate Bayside Capital appointed a new managing director who will lead the European distressed debt activities of Bayside.

And while some firms are recruiting specialists, others are partnering with distressed and restructuring firms. Davies believes this is the best option for PE firms that have never entered this space before. “Distressed purchasing is so far removed from the traditional private equity model and with so few distressed specialists out there, it will be difficult to make money in this market. Those who partner with distressed specialists will do well,” says Davies.

For the time being private equity firms are putting their money on more companies falling into distress. Paul Canning, managing director of HIG Private Equity, says: “Companies will continue to break their covenants and I expect there will be a lot more restructuring that needs to happen.”

Davies is slightly more pessimistic and says: “A Darwinian approach would not be such a bad thing for the UK. The market will return but it will not be a quick fix because the problems in front end industries are so embedded that it will take a long time to recover,” says Davies.