Debt funds urged to prepare for increase in restructuring cases

A worsening economic environment means private debt providers will need to be ready to take control of their portfolio companies.

Private debt funds must prepare to become more interventionist as the economic cycle begins to show signs of weakness, according to Alantra’s head of private debt in Germany, Robert von Finckenstein.

Following a recent roundtable in Frankfurt, von Finckenstein said the current market environment made it clear that restructuring expertise would become increasingly vital for private debt investors operating in Europe, and that some players were already taking steps to prepare.

“Large private debt funds are increasing investing in restructuring expertise as a preventive measure and, like banks, are establishing so-called workout teams,” he said.

The approach to workout teams taken by debt funds can vary. Some managers rely on strict separation of teams for initiating transactions and restructuring, while others take a holistic approach and integrate restructuring expertise from the outset.

Von Finckenstein said it was important to have an experienced restructuring team in place because more lenders would need to take control of portfolio companies as economic conditions worsen, and private debt funds would have to take over control of companies in their portfolios.

Because of the expected uptick in situations where lenders would need to take a hands-on approach, those players that have not built up in-house expertise are being urged to engage with specialist advisers early in the process.

“Private equity and private debt funds without profound in-house restructuring expertise are recommended to seek external advice at an early stage – preferably before credit clauses are breached,” von Finckenstein said.

He said that even after a breach in covenants, it would be possible for both equity and debt providers to come to amicable solutions to restructure companies, but that having restructuring expertise was vital to ensuring a good outcome.