Good time to buy

Michael Pilson of DuPont Capital Management talks to Robert Venes about the role of turnaround, restructuring and distressed funds in his firm’s private equity investment portfolio.

PEO: Which distressed funds have you invested in, and do they have an equity or debt focus?

Michael Pilson, director, DuPont Capital Management

MP: It really depends on how you define distressed – we refer to distressed as the buying of bonds of distressed companies. If you’re including equity, we call it turnaround. Our programme has a significant exposure to special situations, distressed and turnaround, which is how we look at it. The further you get away from a healthy company, the closer it gets to a special situation.

In terms of our programme, DuPont Capital Management is a value manager in its allocation to both public equity and fixed incomes. We’ve always looked at distressed and turnaround and restructuring as a valuable way to play private equity. We’ve been a long time investor in these situations going back to the early 90s.

I would guess that is longer than most others in the market. We have invested with some of the old school distressed and turnaround managers, the guys who put the asset class on the map. We were really the first ones to start doing things that way.

There is a lot of easy credit in Europe and very high multiples being paid and a lot of deals being done. Any blip in the economic cycle, and it will be a good time to buy.

PEO: How does distressed investing fit into your overall allocation to private equity?

MP: I wouldn’t say that we have a firm allocation to distressed investing. It depends on differing economic cycles, we either overweight it or underweight it. Because we’ve been doing this since the early 90s, we know that you can’t time economic cycles – there is a time to overweight and a time to underweight. It’s probably a good thing to manage those commitments over economic cycles.

PEO: Where do you see the opportunity for distressed funds at the current time?

MP: During 2001 and 2002, we over allocated to distressed investments. Liquidity in the market was drying up and an economic downturn seemed certain. The easy credit of the late 90s was backing up and the result was an increase in defaulting loans.  On the supply side there was not a lot of capital targeting the opportunity relative to the scale of the pending defaults and therefore we decided to overweight it. We haven’t invested with a distressed manager investment since, but we sense now might be a good time to put some more money into distressed.

PEO: Is there a bigger opportunity around the corner over the coming 12 months?

MP: I would say there is not as big an opportunity as in 2001 or 2002 but it is certainly bigger than 2003, 2004 and even 2005. There is a lot of easy credit in Europe and very high multiples being paid and a lot of deals being done. Any blip in the economic cycle, and it will be a good time to buy.

PEO: Is there a sufficient choice of managers in the distressed market?

MP: One the US side, absolutely, there are funds that would pretty much do
anything: trading strategies, looking for control positions thru the bonds and players who operate in all levels of the capital structure. In Europe, I don’t think there is enough choice in distressed, there are just a couple of managers doing it on a country by country basis.

Here in the US, the qualities you look for are being disciplined, being aggressive with the companies, and just having a nose for the business – being bold in their investment thesis.

PEO: What type of qualities are you looking for in a distressed manager?

MP: It comes down to an ability to make money through cycles, allocating capital in different geographies when economic cycles change in different parts of the globe, and being able to show success in those different cycles. Here in the US, the qualities you look for are being disciplined, being aggressive with the companies, and just having a nose for the business and being an independent thinker – being bold in their investment thesis.

PEO: How do distressed funds in Europe compare with those in the US in terms of quality and the way in which they invest?

MP: There is Butler Capital in France, Orlando Management in Germany and Rutland Partners in the UK, but they are turnaround shops rather than being able to take control positions through the bonds. In the US, we’ve been doing it longer, so we have a much larger pool of managers to choose from. Players in Europe are very niche, and don’t have the long history or track record that we have in the US.

It’s very difficult to compare as there is a much deeper market in the US.
Sun Capital is making inroads in Europe and are looking at promoting what they do there, but whether the deals will work or not, it is too early to tell, but it is fertile ground for them. Apollo do distressed and are doing things in Europe, so the opportunities are there, but we view Europe as a less competitive playground for distressed.

PEO: Have you considered backing funds targeting distressed situations in Asia?

MP: Yes, we have. There are a couple of managers we have worked on in Japan

For a long time, Asia was a good place for investment but now under-performing loan portfolios are getting smaller and smaller in all of the countries – it’s certainly not what it once was.

for instance. For a long time, Asia was a good place for investment but now under-performing loan portfolios are getting smaller and smaller in all of the countries – it’s certainly not what it once was. So I don’t see the point of turnaround strategies there, as there is so much growth and opportunity for building a growth company. Why would you take on the additional execution risks of fixing a company when you have much better prospects of buying one that is healthy and performing well?

Michael Pilson, who joined DuPont Capital Management in 2001, is a member of the investment team responsible for private equity partnership selection and portfolio management. DuPont, headquartered in Wilmington, Deleware, is a multi-strategy investment manager with over $25 billion under management. The firm is a long-standing investor in the private equity asset class.