Turnaround Pros Say They’re Avoiding Auctions

Out of court and outside the grasp of investment bankers—that’s where turnaround pros say they’re finding their deals these days.

“The days of full-blown auctions are gone,” said KPS Capital Partners Co-Founder and Managing Partner Michael Psaros. The trend today, he said, is for turnaround investors to receive an “invitation” from a crisis manager or workout professional from a corporate bank to take a look at a company with dire operating problems. Psaros added that KPS Capital as a rule does not participate in auctions.

These alternative sale processes tend to be shorter in duration than traditional auctions and include a smaller, more focused invitation list, noted Paul Halpern, a partner and general counsel at Philadelphia-based turnaround investment firm Versa Capital Management, who has also noticed the trend.

“To a certain extent there’s just greater familiarity between the players,” Halpern said. “The crisis manager knows who we are and we know who they are, and there really is no reason to add another intermediary into the process.”

In some cases, it’s the banks—anxious to quickly recoup at least some of their money from troubled companies—that advocate this relationship-oriented sale process. “It’s becoming a tool that the banks are using to accomplish a bankruptcy liquidation at a lower cost,” observed Mike Donohoe, principal & general counsel at turnaround firm Treadstone Partners.

Many of these deals take place out of bankruptcy court. Rather than force the company into bankruptcy, which can be expensive, Donohoe said, the company’s creditors effectively let the company conduct a quiet process within a specified timeframe.

According to Donohoe, it can cost about the same to take a $100 million company into bankruptcy as it would to take a $20 million company into bankruptcy. Therefore, the smaller the company, the bigger the incentive is to keep it out of bankruptcy. “It’s actually a benefit for us as buyers because we are able to look at transactions outside of bankruptcy on a more negotiated basis,” Donohoe said.