For a man who used to be a senior professional at a global private equity firm, Hans Albrecht is rather provincial, at least when it comes to turnaround investing. ?Restructuring is a very local business,? he says. ?We don't venture outside of German-speaking countries. I would never go to Italy.?
Albrecht is the founder of Nordwind Capital, which seeks to invest in turnaround situations in Germany, Austria and Switzerland. Albrecht, a former managing director for The Carlyle Group, has a sporting skepticism about the handful of US turnaround and restructuring consultants that are attempting to establish footholds in Albrecht's backyard and across Europe and the UK. ?I happen to think that their model is not very scalable,? he says. ?If you want to scale it, you have to find locals, and the problem is that there aren't many locals with real restructuring experience.?
When in Rome?
US turnaround management consultants, such as AlixPartners and Alvarez & Marsal, as well as debt restructuring advisors like PrivatewaterhouseCoopers Business Recovery Services, beg to differ. These firms may come across Albrecht and his team as prospects for clients in German-speaking areas. The consultants want to sell services to troubled companies, Nordwind may want to buy them. What they all have in common is a claim to local knowledge.
?Our strategy in developing a successful business in Europe is to transfer our US rescue skills, but do it with European professionals,? says Peter Fitzsimmons, the head of AlixPartners' European operations.
Since 1981, AlixPartners has been advising troubled US companies on how to make the best of bad situations. The firm offers what it calls a ?hands-on, consensual? approach to improving a company's performance. Now, Fitzsimmons says, AlixPartners is eager to apply its techniques to the European market. In January, the firm announced the addition of senior personnel to London and Munich offices. Fitzsimmons himself moved from New York to London to oversee the firm's ramp-up in Europe.
Alvarez & Marsal, another turnaround specialist with two decades of experience in the US, is beefing up its presence in Europe. In January, the firm announced the addition of five senior professionals to its European headquarters in London.
Vincenzo Morelli, a managing director in Alvarez & Marsal's London office, when asked if US firms can compete against local turnaround specialists, says: ?If they send a bunch of Americans over to Europe, then the answer is a clear no.?
Like AlixPartner's Fitzsimmons, Morelli says the key to establishing a presence in Europe is doing so through professionals with local connections, language skills and expertise. He notes that US management consulting firms and investment banks have succeeded in Europe by following the same strategy ? starting with products and services developed in the US, but subsequently ?going native.? Morelli adds, ?There are currently no European firms competing with us, just skilled individual practitioners, and we're hiring them.?
Similarly, Fitzsimmons says AlixPartners is leveraging its relationships with banks, private equity firms and law firms all over the world when searching out talented turnaround professionals who might be hired to preach the AlixPartners gospel.
Demand outstrips supply
The demand for turnaround and restructuring services in Europe is tied to a transforming and integrating European economy. Of course, private equity firms have sought to benefit from the same changes, but along the way many of them have gotten into trouble. Private equity firms tend to get involved in sectors that are experiencing consolidation. Increased consolidation and competition across Europe has triggered increased levels of debt. Hence, the difficulties that bring a smile to the face of any turnaround consultant.
Fitzsimmons says his firm expects to find business among US private equity firms that have set up shop in Europe, many with mixed success. But he also expects interest from large European institutions that formed private equity arms in the late 1990s. ?Now they are seeing that their portfolio companies are having troubles, but they don't have the expertise to address them,? says Fitzsimmons.
Consolidation in Europe has also meant companies from one country acquiring similar companies in another. The cross-border nature of today's European business environment has meant that international conglomerates face seemingly insurmountable complications when attempting financial restructurings. This has led to solid business for firms like PricewaterhouseCoopers Business Recovery Services, which employs roughly 1000 professionals across Europe.
?Complications come where you do a cross-border restructuring and people try to bring a solution from one territory and impose it on another,? says Richard Boys-Stones, a partner in PwC's London office. ?What we bring to the party is that we have local knowledge of custom and practice and we supplement that with specific industry and restructuring expertise. It's a competitive advantage that is difficult for people to replicate.?
Alvarez & Marsal's Morelli says his firm's decision to push aggressively into Europe also has to do with changing insolvency laws across the region. Broadly speaking, laws in the UK and Europe have historically favored senior creditors to the extent where a business was sooner liquidated than given a second chance as a going concern. ?That led to a massive amount of value destruction,? Morelli says.
Now, laws across the European Union and the UK are changing to more closely resemble bankruptcy laws in the US. While many of these reforms are still rather ?timid,? Morelli says, business culture is also changing. ?It has dawned on many banks that they are much better off seeking an informal restructuring. You could call it an informal Chapter 11 situation. This has opened an opportunity for us.? Morelli says that his firm is currently ?at capacity? with assignments in Europe.
Roughly half of this business is from private equity referrals. Private equity firms that hire Alvarez & Marsal come in two types, Morelli says ? those that listen and those that should have listened. ?There's one type where the private equity firm has left it until too late,? says Morelli. ?We've been called in to help minimise their bankers' losses so they can at least maintain a relationship. In the other situation, our gospel has been heeded. They call us at the first whiff of trouble.?
Despite the many troubled companies across Europe and the UK, the US firms attempting to capture business from them admit that many of these potential clients may have reservations about hiring a turnaround consultant, let alone one perceived to be American. Even local turnaround specialists often find themselves at odds with the prevailing business culture.
?Turnarounds are an underrepresented part of the market,? says Sion Kearsey, co-founder of London-based Kelso Place Asset Management, a private equity firm focused on distressed companies. ?No one else really gets it, and no one is able to get operationally involved. That doesn't work in the turnaround business.?
Nordwind's Albrecht says he left Carlyle's European operation because the firm has an understandable aversion to acquiring poorly run companies. ?There was this company that made engine blocks. It had rising debt and I wanted to buy it,? remembers Albrecht. ?My colleagues said, ?Hans! This is a shitty company!? I said, ?I know, that's why I want to buy it!??
Albrecht draws a distinction between giving advice on financial restructuring and hands-on crisis management. The first, he says, ?is easier,? the second requires the ability to actually run and improve the operations of a distressed company in a specific locale with a specific legal, regulatory and cultural regime. ?You have to cope with the unions, cope with the regulatory bodies,? he says. ?And if you don't speak the language of the second line of management, you've got a problem.?
Michael Psaros agrees. His firm, New York-based KPS Special Situations Fund, has not done any deals in Europe because, he says, ?it would be extremely difficult to transplant large parts of our strategy over there.?
?We've done a lot of business in Canada,? he admits. ?But we found it to be vastly different from the US. And if it's that different, I can't imagine what it might be like to do business on the Continent.?
On the other hand, in a market where German turnaround specialists claim ignorance of the Italian market, and French restructuring specialists shrug at the Dutch market, perhaps big, international consultants that claim expertise across multiple cultures and regulatory regimes stand a chance in a rapidly integrating Europe.