The long, painful process of forced liquidation of the assets of Fannie Mae and Freddie Mac, Lehman Brothers and American International Group (AIG) has only just begun, but already financial market observers are wondering where the vulture capitalists, who are descending literally on their prey, will once again take advantage of the ambient distress.
Investors specializing in distressed assets know from experience that it is better to wait for the cycles to mature before committing to buy, according to Jeffrey Manning, director of Trenwith Securities, an investment advisory firm that supports bankrupt companies. based in Costa Mesa (California).
“The weakest of the herd crumble in the early part of the cycle, and in the middle of the cycle you start to see some strong companies forced into bankruptcy,” he observes. (Many financially healthy firms end up filing for bankruptcy just to partner with others who have already been there, because they have better financial backbone). “That’s where the best values are found.”
It’s time to drop the pressure
Vulture capitalists are comfortable when the values of the companies they target deteriorate over a longer or shorter period, unlike the sudden bankruptcies seen in the financial sector, observes David Astorino, who heads the Management Due Diligence Practice group at RHR International, a management consulting firm based in Wood Dale, Illinois. A slow deterioration gives private shareholders enough time to carry out tests allowing them to be sure of their purchases and to mobilize the financial resources necessary to conclude, he adds.
With a financial system in a state of shock, and companies wondering what to do with their balance sheets, it could take 30 days or 12 months, or even longer, until the necessary pressure drop takes effect, says Manning at Trenwith.
Wilbur L. Ross Jr, the billionaire investor with a past as a bettor on distressed companies said on September 17, 2008 that (in his opinion) banks will be particularly affected by the Wall Street crisis and will therefore be easy prey for investors. scavengers. Earlier this year, when financial guarantees came under pressure due to the subprime mortgage crisis, Ross invested $250 million in Assured Guaranty, betting that the insurer’s bonds would regain a sufficient position to buy out smaller structures. which could disappear because of risky investments.
1000 Banks Could Go Under
His most recent bank turnaround investment was in Japan, but Ross is instead emphasizing his experience restructuring US banks during the crisis of the late 1990s, when he managed a private investment fund within the LCF Rothschild Group. “We are comfortable with banks and we have a partnership with John Kanas, who set up the North Fork Bank with barely 20 million dollars in capital to reach 60 million to finally sell it at the best price” he says. “We have the team to straighten out the banks. »
Ross, who is CEO of WL Ross & Co, predicts that about a thousand banks will fail as a result of the current crisis. The fact that 70% of the capital of his company is in cash opens up “great possibilities for managing these problems”.
For his part, Manning finds the estimate of 1,000 banks rather reasonable, given that he has heard that 8,000 banks have not reviewed their statements since the market collapsed. However, because taking over banks, unlike commercial enterprises, raises thorny regulatory issues, he believes that the interest of vultures would be limited.
Target safe assets
Manning instead sees a more buoyant sector in which he estimates that 800 to 1,000 private equity funds have been made over the past five years in various industries; they are reaching maturity and cannot be refinanced at the old rates. “As these loans reach maturity, even private investment companies will have to write a check for the difference or will have to find another means of financing, or even go to court to ask for an adjustment,” he predicts.
The first to go bankrupt will be companies with small capital, such as software manufacturers, information technology suppliers as well as manufacturers of medical devices which are all based on intellectual property. Their key asset is the employees who come home every night.
RHR’s Astorino believes a balanced balance sheet gives Barclays a better position to take over North American investment bank Lehman than any other private equity fund. Barclays offered $1.75 billion, acquisition including majority of employees, franchise, company name and clientele, but not risky positions or debts that caused investment bank to file for bankruptcy September 15.
“I don’t believe that we can buy these companies and then put them in a private investment fund,” he adds. “Private equity funds have different requirements before committing to invest.”
Nor does Astorino believe that private investors, who “generally look for something specific when investing,” will change their criteria to gain any advantage from the crisis.
Whether vultures choose to buy entire companies, instead of taking a few positions, will depend on what can make them the most money, Manning thinks. As long as it is the financial sector, he believes that investors will prefer to buy securities backed by mortgages, but not the company that offers them. “We don’t need to buy out staff. We just want the financial instrument” would be more their opinion, he told himself.