A majority of private equity general partners surveyed by Debtwire expect to restructure at least one of their portfolio companies in the next 12 months, and 38 percent of respondents said they will sell assets to do it.
The survey found that 62 percent of 30 general partner respondents anticipate a restructuring in the next year. The survey also revealed that 73 percent of respondents expect to use “new money” to restructure their portfolios, with 38 percent opting to sell assets to restructure, 27 percent anticipating deleveraging as part of a restructuring and just 18 percent predicting a cash injection from new management.
A panel of experts at the European Distressed Debt Market Outlook 2009 today discussed the results of the survey and expressed “surprise” that half of the private equity respondents believe distress restructurings will peak in the second or third quarter of 2009.
The panel included Justin Bickle, senior vice president of Oaktree Capital Management; Richard Nevins, a senior partner at Cadwalader, Wickersham and Taft; Kevin Hewitt, a senior managing director at FTI consulting and Richard Millward, a managing director of the Rothschild restructuring advisory group.
The optimistic result shows that 32 percent of the private equity respondents believe distressed investment will peak in the third quarter, while 25 percent predict it will peak in the second quarter. This is in contrast to another survey conducted on hedge fund managers and long-only investors showing that only 6 and 9 percent, respectively, agreed with the private equity results, while 27 percent of respondents said that distress investments will peak during the fourth quarter. Another 21 percent of those surveyed put a marker on the first quarter of 2010.
“If private equity really does believe that a peak [of distressed investment] is just around the corner then they have a calamity on their hands,” Hewitt told delegates. He predicted there would be more distressed investment in the mid-market, but said the industry has got to find ways of getting out of insolvency to halt a short-term cycle that will result in subsequent restructurings within a period of only a few years.
“Restructuring will peak later in the year, probably not until the fourth quarter and the cycle is going to extend to 2010 and 2011,” Nevin predicted.
The survey also found somewhat less surprising results, such as 50 percent of respondents believe leverage to be the main trigger in restructuring portfolio companies.
There was additional optimism, however, with 42 percent of respondents expecting normality to return to the credit markets within the next year. Going into 2010, 38 percent of respondents expect to see sustainably low leverage levels returning, with most expecting debt to make up around 20 percent of the capital structure.
The panel discussed the slowdown in deal making, the lack of liquidity and the short term pitfalls of pre-packed restructurings that keep on too much debt. They stressed the need for a “one-time solution” for distressed assets, and ruled out multiple jurisdictions.
“Self help for private equity is needed,” Hewitt said. “With some of the deals we [FTI Consulting] are getting involved in, the firms are only just getting to know the portfolios being restructured. It is so important to understand the dynamics of your investment so you can take decisive action. Self help is committing to what needs to be dealt with early,” he said.
The survey of 30 private equity investors in Europe was conducted by Debtwire, a news and data provider which is part of The Financial Times group, in conjunction with Cadwalader, FTI Consulting and Rothschild.