Distressed Debt Investing interviews Mark Berman

We are very excited to bring you an interview with Mark Berman, founder and Managing Partner of MB Family Advisors, LLC and the MB Dislocation Opportunity Fund, L.P., a dislocation / distressed credit fund-of-funds. MB Family Advisors, LLC is a multi-family office investment firm founded in 2008 to manage investment portfolios for ultra-high net worth families across asset class, with a particular focus on alternative investments and investing in inefficient markets.

Mark will be speaking at the upcoming Global Forum on Investing in Distressed Debt, coming up this month in NYC. If you remember, this is an event I have helped to organize. I really hope all my readers will attend.

Enjoy the interview!

Mark - Could you give us a little bit of background on yourself and MB Family Advisors?

Sure. In a former life I started my career as an M&A attorney at Skadden, Arps but I’ve been a principal investor since 1994, mostly in firms where I was a Founder or Co-Founder and invested substantial personal capital alongside my investors. Initially I focused on small and mid-market buyout investing and had some great success as well as luck (for instance our marquee buyout transaction generated a return of almost 60x our equity investment). I started investing in hedge funds in 1997, both single manager and fund-of-funds. In 2001, seeing the inefficiencies in the private equity secondary market I co-founded a fund firm that purchased in the secondary market limited partnership interests in real estate private equity funds. The common theme to my investing career has been to focus on finding inefficient markets where a provider of scarce capital can generate outsized returns.

The search for inefficient markets required that I develop deep experience across multiple asset classes – private equity, hedge funds, credit markets, real estate etc. This broad experience led to the launch of MB Family Advisors, LLC in mid-2008 when I formalized a relationship with an anchor investor to manage his family’s investment portfolio across asset class. The anchor investor has a low 9-figure net worth. The intention has been that over time I would add additional family clients and on occasion offer specialized investment products that could opportunistically target particularly inefficient opportunities.

The first investment product came in January 2009 when I launched the MB Dislocation Opportunity Fund, LP, a dislocation/distressed credit fund-of-funds. The Fund is intended to provide investors with diverse exposure across a variety of different credit, distressed and other niche strategies including traditional long/short corporate distressed; asset based lending; structured credit; merger arbitrage; and mortgage debt markets (RMBS/CMBS & whole loans), among other strategies. The common denominator in all the Fund’s allocations is that we invest in strategies positioned to benefit from ways the capital markets have changed since the 2008 financial crisis.

We have to say, a January 2009 launch of a distressed credit fund-of-funds seems incredibly prescient. When you were looking out at the world at that time, why did you think that was the opportune time to invest?

Well, for starters I’d note that it’s more of a “dislocation” fund than pure distressed credit. As indicated, we’ll invest in any strategy we think has benefited from the 2008 financial crisis. Distressed debt is just one of the underlying strategies.

As for timing of the Fund’s launch, as I alluded to I think the best investment opportunities come from inefficient markets. As capital markets imploded in the Fall of 2008 credit markets in particular became so highly dislocated. Credit completely froze. While there was substantial continuing uncertainty regarding the severity of the recession it was already clear by year-end 2008 that the US and other developed country governments would not allow the complete collapse of the financial system. However, the complete lack of liquidity and fear associated with uncertainty created forced and/or highly motivated sellers resulting in substantially mis-priced securities and assets.

The mis-pricing existed across multiple markets including leveraged loans, ABS, DIP lending, ABL lending and others where all of a sudden you could target high, equity like returns or better investing at the most senior, least risky part of the capital structure. I wanted in on that action.

To get sufficient diversity of strategy and manager I decided to launch the fund-of-funds and take in outside investor capital. In hindsight our timing was good. It’s still early but we’ve enjoyed great success thus far and have generated positive returns in 18 of the 20 months since launch.

We see you have had tremendous success to date - What are your thoughts on the distressed market today? Do you worry that so much capital has entered the space over the past 12 months that returns going forward could be squeezed out?

The nature of the opportunity set has changed. Initially the opportunity existed to get 20%+ returns on high quality, performing assets that were not distressed but were trading at distressed prices. That trade is over.

For reasons I’ll describe, over the next 12-18 months I think there are other niche strategies more compelling than distressed corporate debt. However, there are attractive opportunities currently in some mid-market distressed names and beginning in late 2011 or early 2012 the overall distressed market will become extremely compelling again.

To me it’s clear that we’re in the midst of what will be a multi-year distressed cycle. The upcoming wall of debt maturities has over $1 Trillion in corporate debt coming due (and this excludes mortgage debt), much of which was issued in the go go years of 2005-07 and is stuck in unsustainable capital structures. Sure, “amend and extend” has kicked the can down the road but for many of these companies the day of reckoning will nevertheless come. At that point there will be a huge supply/demand imbalance in favor of distressed debt investors and 20%+ return potential will exist again.

Several high yield analysts have recently opined that all the debt extensions are solving the wall of debt maturity problem but I think they are misguided. High yield issuance is at record levels but something like 70% - 80% of the issuance has been for tenders to replace existing debt and extend out maturities. Yes, this has resulted in default rates coming way down for large cap companies that can access the high yield market. It’s true that this makes the distressed opportunity set much less attractive in the near term --say over the next 12-18 months -- but this is a temporary phenomenon. While you can solve a liquidity problem with more debt you generally can’t solve a balance sheet problem by issuing more debt unless growth is so robust that substantially higher cash flow can meaningfully shrink leverage and coverage ratios. (Unfortunately this is a lesson our government hasn’t yet learned but that’s a topic for another day.) The prospects for this type of hyper growth in cash flow are quite slim.

So, in the near term there will be fewer large on-the-run names in the distressed space and returns will be squeezed but with a little patience distressed debt will be quite compelling again. In any case, it’s important to appreciate that through Q2 of this year default rates for small and mid-cap companies were still in excess of 10%. These companies do not have access to the high yield market and have far fewer options to kick the can down the road. Therefore, in my view the most attractive distressed opportunities for the next year or two will be in the mid-market. This is an important consideration when assessing who to allocate distressed capital to.

Perhaps that’s a lot to digest but the bottom line is that I think (A) over the next 12-18 months there is more opportunity in other niche credit strategies like direct and asset based lending, (B) within distressed the best opportunities in the next 12-18 months are going to be in mid-market names and (C) as the day of reckoning on the wall of debt maturities gets closer, the overall distressed market will become extremely compelling again and offer 20%+ potential returns.

When you are looking to allocate capital to a manager, what do you look for? Do you tend to allocate across smaller funds or larger funds?

We take a portfolio approach so it’s very important the individual component allocations fit together well. To some extent this means limiting correlation among underlying managers, each of whom has to bring something different to make it into our portfolio. We intentionally have a mix of small and large funds. Generally speaking our bias is for funds that use no or limited leverage; that don’t have 2008 legacy problems either in their portfolio or business; and have a stable underlying capital base.

With regard to individual manager decisions, like most allocators it’s important for us to understand what the particular manager’s “edge” is and get comfortable with the manager’s superior talent, ability to source ideas, integrity, commitment to best practices in back office and reporting, and passion generally for what they do.

In addition, three super important hot buttons for us are (i) interest alignment, (ii) risk management and (iii) world class investment process. If we aren’t 100% comfortable with these issues then nothing else matters. I’d note that process generally is under-appreciated among many investors. Great results come out of great process, period. We’re much more focused on seeing a rigorous, disciplined and repeatable process than we are on recent historical performance.

Continuing on allocation, when looking at your group of portfolio managers in which you have invested, how do you determine which manager will get the next dollar of your investor's capital? Does it depend on the underlying portfolio manager's strategies?

Yes, strategy is critical. Going forward I believe the best investors will distinguish themselves by being in the right strategies, as the environment will be ripe to reward certain strategies and punish others. While there’s no substitute for talent and motivation, a B+ manager in a strategy with substantial wind at its back will substantially outperform an A+ manager in a strategy with headwinds. I am extremely attuned to this in portfolio construction and it does heavily influence the allocation of incremental investment dollars.

It also drives occasional redemption decisions. Early this year I redeemed from a credit fund that generated net returns of 45% in 2009. It was a difficult decision in that the manager was talented and had really delivered for us. However, it was a long-only fund focused on a particular segment of the credit markets. That segment had rallied so substantially to the point that the opportunity set going forward no longer presented a compelling risk-reward profile– so I redeemed.

The other consideration that’s also critical is liquidity. Different funds have different lock-up and notice requirements and, at least in managing the Dislocation Fund, we have to make sure we don’t risk an asset/liability mis-match. This is less important in managing the family office portfolios but even there you want to make sure you are being compensated if you’re giving up liquidity.

Among the strategies in which you allocate capital (traditional long/short corporate distressed; DIP lending; merger arbitrage; asset based lending; fixed income arbitrage; asset backed securities; structured finance; and mortgage debt markets), where do you see the most opportunity today? The least opportunity?

Our strategy allocations are driven by the broad thesis that the dislocation experienced since the 2008 financial crisis will persist for multiple years, creating both opportunities (and risks). There are three primary drivers of our opportunity set:

(1) The wall of debt maturities – as discussed earlier there is over $1 trillion of high yield debt and leveraged loans coming due (nearly $4 trillion if you include mortgage debt). Much of this will eventually need to be restructured which feeds classic distressed debt investment strategies;

(2) The availability of capital is highly bifurcated: for companies large enough to tap high yield, credit is widely available -- but for companies with less than $50M in EBITDA and those looking for asset based loans credit is still extremely scarce. This creates opportunity for those managing direct lending and ABL funds to invest at the most senior, least risky top of capital structure but still get high equity like returns; and

(3) Certain strategies are positioned to benefit from the deleveraging because far less capital is chasing the spreads. An example of this would be low risk merger arbitrage where spreads are materially higher than what they were a few years ago because prop desks have shrunken and hedge funds have far less leverage available.

Over the next 12-18 months I think the most attractive strategies fall out of the 2nd and 3rd drivers – i.e. those that can be a provider of scarce capital and/or those benefiting from deleveraging. In particular I think direct lending, asset based lending and merger arbitrage are quite attractive right now – offering the potential to generate equity like returns without equity risk. In addition to the attractive return profile, if executed properly they are relatively low risk and, importantly, come with little or no correlation to the public equity or fixed income markets.

We know many emerging distressed and credit hedge fund managers will be attending the IQPC Global Forum on Distressed Debt coming up in September. We know many smaller managers have difficulty attracting the attention of fund of funds. Could you shed some light on things emerging managers could improve to better attract outside investor capital?

Fundraising is difficult for emerging managers. In my view the best positioned emerging managers are those with a differentiated strategy. If it’s not differentiated the bar is so much higher as new funds do have higher business and operational risk.

That said, the data is clear that as AUM increases manager returns decrease. Emerging managers could do a better job of highlighting this data – it’s strange but I don’t see it that often in emerging manager pitch books. Many talk about their ability to focus on off the run names but don’t necessarily draw the cause and effect relationship supported by empirical data. Good allocators should already be aware of this but I think emerging managers would be well served by highlighting it more. Emerging managers that are committed to capping AUM at a certain size for a defined period of time may also send a message to investors that they are more focused on generating high returns than on high fees.

Of course, in today’s environment an emerging manager has to be committed to best practices with respect to back office, operational and reporting functions. Operational due diligence has taken on a heightened level of importance and it’s easy to say no to a good investor with only mediocre controls. This can be challenging for an emerging manager who has less resources than a larger fund but nevertheless the emerging manager needs to demonstrate this commitment if they want to attract institutional capital. Likewise, having a highly credible Administrator, Auditor and Prime Broker is also important.

Finally, for me interest alignment is critical with all managers but even more so for an emerging manager. That means it’s often a non-starter if a substantial majority of the manager’s net worth isn’t invested in their fund. You take a little bit of a leap with any emerging manager but can get a higher level of comfort if the manager has a larger investment than you do in his or her fund and is essentially managing their own capital and you’re along for the ride.

When we do invest with an emerging manager we’ll generally start small and build the relationship over time.

You have been incredibly successful in setting up a number of investment partnerships. What is next for you?

Never say never, and I suppose it’s possible the umbrella I operate under could change, but at this point it’s hard to see me doing anything else. This is an incredibly fascinating time to be an investor. The investment landscape has changed dramatically since the 2008 financial crisis. There are so many opportunities and so many landmines, and the intellectual exercise of navigating that balance is more challenging and rewarding than anything I’ve done professionally to-date. I love how I spend my days. The challenges and uncertainty also place a higher premium on talent, which I hope accrues to my benefit.

Read more...

Advanced Distressed Debt Lesson - Equitable Subordination

One of the best things about the Distressed Debt Investors Club is the collective knowledge of a group of very strong analysts and portfolio managers that have trafficked in a number of very complicated bankruptcy proceedings. No two bankruptcy cases are exactly alike. For various reasons (judges, capital structure and guarantees, covenants, outside interest), the chips can fall in a number of different ways in the same bankruptcy proceeding. The bankruptcy code and each of its articles can be interpreted differently by numerous parties. It is what makes distressed debt investing so fascinating.

With that said, DDIC member Paul has penned a piece for us on equitable subordination. Given the complexities of capital structures that have evolved over the past cycle, it is a crucial concept for distressed investors to understand. Enjoy

Equitable Subordination

Analyses of distressed investments often range from the relatively straightforward to the mind numbingly complex. For investments in companies with a simple capital structure, investors will focus on factors such as cash flows, collateral value and terms of the governing credit document.

In larger, more complex companies, investors might have to analyze many additional issues involving restricted and non-subsidiaries, guarantees, security, baskets, carve outs, and covenants, just to name a few. When a company files for bankruptcy protection, additional considerations arise requiring an understanding of the bankruptcy code. One of these considerations involves equitable subordination.

Equitable subordination is a doctrine outlined in Article 510(c) of the Bankruptcy Code. The language from the Code states that equitable subordination allows a court to “subordinate for purposes of distribution” all or part of an allowed claim to another allowed claim when equitable principles require. Interestingly, the Bankruptcy Code does not provide guidance on when equitable subordination should apply. The Court, instead, typically relies on a standard created by the Court of Appeals for the Fifth Circuit involving three conditions:

1. Inequitable conduct by the claimant
2. Misconduct causing injury to creditors or the bankruptcy estate or conferring an unfair advantage to the claimant
3. The finding of equitable subordination must be consistent with bankruptcy law

Distressed investors should bear in mind a few additional principles when evaluating potential equitable subordination issues. One is these issues involves the distinction between an insider and non-insider. An insider’s conduct is subject to a higher level of scrutiny than the conduct of a non-insider. Another issue involves the application of remedies in equitable subordination cases. In equitable subordination Orders, the Court will offset the harm suffered by creditors on account of inequitable, or unfair conduct. The Court, however, will not necessarily subordinate the full value of a claim as part of the remedy.

Equitable subordination is frequently alluded to in bankruptcy cases by investors who have witnessed a steep fall in the value of their securities. Courts, however, do not often find that questionable tactics prior to a bankruptcy filing meet the high standard of egregious misconduct required in equitable subordination cases. A recent exception to this rule of thumb is Yellowstone Mountain Club, a bankruptcy filing in the District of Montana. In this case, Debtor and the creditor committee claimed that a secured loan in the amount of $375 mm constituted a fraudulent transfer. Without getting bogged down in the legal details of the case, the Court ruled in favor of the Debtor and creditor committee, finding that the lender’s actions “were so far overreaching and self serving that they shocked the conscience of the Court.” As a remedy, the Court subordinated the lender’s secured claim to the claims of unsecured creditors in the case.

With a robust understanding of equitable subordination, distressed investors should tread carefully as they evaluate purchasing senior securities that may have unfairly disadvantaged junior securities in a capital structure.

Read more...

Distressed Debt Investing Primer

Gramercy has put together an incredible overview of distressed debt investing. Gramercy is a dedicated emerging markets investment manager based in Greenwich, CT with US$2.5 billion of assets under management. The firm offers investors superior risk-adjusted returns through a comprehensive approach to emerging markets supported by a transparent and robust global platform. Gramercy offers both alternative and long-only strategies across all asset classes (external debt, local currency debt, corporate high yield debt, distressed debt, equity, macro, private equity, and special situation). Enjoy!

Overview of Distressed Debt Investing 8-31-10 - Gramercy (1)

Read more...

Exclusive Interview: Jon Moulton

It gives me great pleasure to bring to our readers an interview with private equity legend Jon Moulton. Between 1997 and September 2009 Jon Moulton was the Managing Partner and founder of Alchemy Partners. Previously at CVC, from 1985 to 1994 Jon was the Managing Partner and founder of Schroder Ventures, where he focused on LBOs and venture capital. Between 1994 and 1997, Jon was the Director in charge of LBOs at Apax Partners. He has been involved in numerous turnaround deals since 1980.

In late 2009, Moulton launched Better Capital, a fund focused on the acquisition and operational turnaround of underperforming businesses. Moulton and Better Capital have been in the news recently with their purchase of Reader's Digest UK.

Jon Moulton will be speaking at the upcoming European Investing in Distressed Debt Forum. For all those that are interested, you can listen to the podcast as well as read the transcript, here:

Distressed Debt Investing interviews Jon Moulton

And to all my readers: If you have any feedback or additional questions for Moulton, please contact enquire@iqpc.co.uk or +44(0)20 7368 9517.

Enjoy the interview!

Big Challenges, Extraordinary Opportunities and the Coming Wave

Jon, thanks for joining us. Now, firstly, can you give a little background on yourself and the founding of Better Capital?

Yes, I’m quite an elderly, private equity man. I’ve been around for thereabouts 30

years and greatly enjoy it. My previous firm was a mid-market private equity firm that really

didn’t want to focus on turnaround, so I left them and set up Better Capital last autumn. We

did it in a rather unique way. We set it up on the public markets. We’re now on the main

market of the London stock market. We raised £210m with a view to invest solely in

turnarounds of UK and Irish companies, hoping to basically make some money out of the grief

driven by the recession.

Jon, out of all the organisations that you’ve been a part of,

which experience did you find the most rewarding? And also, which deals stand out in your

mind as just incredible successes?

This is a really difficult question, because I’ve been around for an awful lot of

different deals with different characteristics. In terms of making money, probably the best deal

I ever did was one at £243 million, which was a deal with AG Stanley, a retailer we bought out

of. But in terms of deep satisfaction, probably Parker Pen is a deal that really stands out in my

background.

Parker Pen was a business in Janesville, Wisconsin, though it was known all

over the world. Most people thought it was a British company. It was run terribly, losing £20m

a year, or thereabouts. It had all kinds of liabilities, nonsense, massive overheads.

We did something amazing: we bought the company quite cheaply, closed the head office in

the United States and put one of the subsidiaries, which was the English subsidiary, in charge

of the world. It had a delightful chief executive, Jacques Margry. And over the course of the

next seven years, with management working with us in a productive way, that was really

rather nice to do.

We took that to making £40m-odd of profit, and a hugely successful deal

with seven years of 72% IRR. And it was, by the standards of the industry, a fantastic deal.

And lovely people to work with, delightful company. Everything went in the right direction. The

only sad bit was actually it was sold to Gillette and two years later it was back in loss, which

shows the impact of not having the right management. But it was just an incredible success,

delightful people. It made a lot of money and it funded several very successful divorces.

Can you talk about another of your deals, Better

Capital’s acquisition of UK Reader’s Digest - what was your rationale for this purchase?

Right, well, UK Reader’s Digest was a very unusual deal. Reader’s Digest is a US

corporation, a big one. It had got itself into some difficulty with rather an unpleasant balance

sheet - too much debt and massive pension liabilities in both the US and the UK. The UK

operation was making a modest loss on sales in the sort of £60m-something range, but it had

an enormous pension liability. I don’t think we ever knew what it was, but something well in

excess of £100m. The company thought it had negotiated a deal with the UK pensions

authorities, the Pension Protection Fund. It was really startled, having thought it had agreed it

and sorted out its problems in the UK, to have the pensions regulator overrule the Pension

Protection Fund - something which we don’t think has ever happened before or since.

As a result, it had to put the UK into bankruptcy and to administration, which it did. And it w

ouldn’t buy it back, the US parent, without actually significant risk of the pension fund being

reassessed under the rather severe UK pension rules. So, the deal was very odd, because, of

course, the parent was actually letting one of its biggest subsidiaries lose its brand name, so

a very unusual deal.

From where we sat, it was a company that was really rather heavy with costs in the UK. Its

offices were in Canary Wharf, which seemed unnecessarily luxurious. The combination of rent

and its pension liability meant that the company started off at about -£8m before it started to

work, in a year. So, we’ve taken out all that cost, made some management changes, started

putting in some new IT systems, and we’ve seen an enormous benefit. The company is

trading far, far better now and we’re pretty optimistic about the future.

The business is an unusual one. Most people think it’s just the magazine; the magazine is

actually only about 15% of their revenues. Realistically, they’re a very effective direct mailer

that sells lots of books, DVDs, CDs, and financial services. It’s going well. Our rationale for

the purchase was quite straightforward: we could buy it reasonably cheaply. By turning it into

substantial profit, we would hope to make a lot of money.

Now, moving on to the economic crisis, which is

obviously still a key topic, you were quite prescient in your predictions for the economic

malaise that we find ourselves in today. I understand that you’re also quite negative on the

economic prospects for the future in the UK and Europe. Now, how does that shape your view

of the future of turnaround and distressed investing?

This is the toughest question, I think, you could reasonably ask me. What is very

clear at the moment is that the only certainty is uncertainty. The European and UK economies

are full of issues - too much debt, too much sovereign debt, large deficits, the effects of

pulling back those deficits, pulling in public sector spending, weak demand. Today we’re

looking at stock markets falling all over Europe.

The future of the economy, though, looks to me to be fairly bleak. We’re in the middle of a

bombed bubble with very, very low interest rates. Those will reverse. When they reverse, we’ll

see the economy is going through a terrible shape, and the opportunities for distressed

investing will become very large.

At the moment, our basic approach is we’re only going to do really rather special and

attractive situations, and we’ve got to wait for the inevitable tidal wave of bad deals to come

hurtling towards us when interest rates rise and when the economic prospects become more

clearly adverse, both of which I sadly expect some time over the next year or two. I could

easily be wrong, but that’s certainly the basis we’re going for: no rush, wait for a wall to come.

How do you distinguish

between a business with a possibility of a turnaround versus a business in a permanent

secular decline? In either type of situation, how much does valuation come into play, versus

the possibility of getting your hands dirty in the business to improve operating results?

Right, okay. So, let’s start off. Businesses are in permanent secular demand. Say,

UK coal mining, you can make money out of it, because there’s cash flows. The companies

will generate more cash than they can handle. So, you have to buy them very cheaply. Those

kinds of opportunities still work. What you mustn’t do is buy a pretty-well dead business,

something which is just simply declining very rapidly, and no matter how quickly you cut the

costs and chopper the business, you never end up with much in the way of a positive cash

flow, and eventually the closure costs absorb everything you put in.

So, what we try and do - well, mostly actually - is buy companies which are not first division

companies, but they’re not the ones doomed to relegation, from the bottom division. The sort

of middle-of-the-road companies with modest growth possibilities, which, because of m

ismanagement, because of silly strategy, perhaps just because of ill luck with the litigation

or something, are in serious trouble. And these we can then buy at a reasonable price,

because nobody knows how to price loss-making companies, turn them into profits and make

some money out of it.

Now, the process of taking a company from loss to profit is sometimes really easy. Most of

the time it’s moderately difficult and it involves a number of steps. The more steps that you

need to take, the more difficult the steps are that you have to take, the riskier turnaround

becomes. So, I typically prefer shorter turnaround. It’s one which, I’m afraid, involves lots of

negative actions: closing things, stopping selling products. Just taking cost out, because that’s

predictable, controllable, whereas doing a turnaround which relies on increasing sales or

margins, that’s not so controllable; that’s much harder to predict.

The more you have to do, the cheaper the deal has to become, because obviously time is

money, and the more really difficult cases we take on, the less we can do. We’ve got to

optimize

the pile of money we have and the people we have to do it. So yes, it’s a trade-off,

sometimes a very difficult trade-off to estimate, because one of the other things about

turnaround companies is that typically they come with mediocre or even bad information, poor

financial controls, poor understanding and poor basis for us to understand it. You can make a

lot of money in all kinds of deals if you just keep your eyes open.

What do you look for in a management team? How do you find the

particular CEO that can turn a certain business around?

Well, the whole thing at the moment is that this is probably the easiest part of our

business. We know a very large number of turnaround chief executives, many of whom have

done somewhere between one and a half a dozen turnarounds before. And there aren’t as

many deals around as there are CEOs, so finding one is quite easy. What do you look for in a

turnaround management team? Well, you look for somewhat different characteristics than you

would in a stable business. First of all, you need a highly decisive management team. Better t

hat they take 100 decisions and get 80 right, than they take 20 decisions and get 20 right.

The company needs to turnaround quickly, stop losing, stop haemorrhaging. So, somebody

with a bias towards action; somebody prepared to tackle radical things; somebody prepared

to basically absorb the shock of the unexpected, because turnarounds are littered with those.

These characteristics are fine for taking a company from loss to profit; they’re typically not the

characteristics you want in somebody to run a stable business. So, turnaround managers,

quite often a couple of years out, you don’t need them and don’t want them. You want

somebody more stable, and the good turnaround managers know that too.

Which investors do you admire? Which investors have shaped

the way that you approach deals, Jon?

In the UK, I’m afraid, the field of potential investors in turnaround is really very

small. What have we got? We’ve got Endless, Rutland - those are the two largest names in

the marketplace besides us. It’s a very small field. In terms of which investors I admire,

people like Wilbur Ross from the US are far, they’ve done far more than anybody in the UK

has done in turnaround. You definitely have to give them their degree of admiration for doing

it. They’ve tackled some very, very difficult companies, and made an enormous amount of

money out of it. You see the same with people like the Gores group in the United States. The

scale of the turnaround market in the US is so much bigger than it is here. The heroes, I’m

afraid, are still at the other side of the Atlantic. If interest rates rise, if the banks discharge

their loads, then perhaps we’ll see some real heroes appear here.

Now, talking of the US, a significant amount of capital has obviously been raised

by private equity and distressed debt hedge funds to effectively pick up assets on the cheap. W

ould you say that this phenomenon is occurring in the UK and Europe in general, and

do you approach deals more cautiously in these types of environments?

Right. Several questions, really, underlying that. First of all, in terms of people

raising money for distressed debt investing, hedge funds, some of the giant international

players in distressed debt, like Oaktree, are here in very substantial volume. There’s no

shortage of buyers for distressed debt. And, as we speak, actually the pricing of distressed

debt looks pretty unattractive. There’s not much reward for quite a bit of risk. There’s no

shortage of money in the distressed debt area.

Private equity funds playing in turnaround on distressed in Europe in the UK, they’re much

thinner than the United States. There are less of us. And at the moment there needs to be

less of us, because the banks aren’t releasing assets in volume and the very low interest

rates mean that lots of really quite financially stretched, poorly run businesses can chug along

a little longer before the reality eventually bites on them.

So, does it mean that I approach deals more cautiously? No, not at all. They really don’t bear

on me. The private equity world is lowly competitive at the moment in turnaround. We’re really

not a distressed debt fund; we don’t just buy debt because we think it should be priced at 80

and it’s trading at 60. That’s a perfectly good way to make a living, but it’s not what we do. We

buy control of companies that need an operating turnaround, and there isn’t an excess of

competition at the moment; not like a mid-market private equity firm, where at the moment

there are 85 or so competitors in the London market alone.

Finally, we’re know you are speaking at the

European Investing in Distressed Debt Forum. One of the topics that you’ll be covering is ‘big

challenges, extraordinary opportunities, and the coming wave’. What key talking points do you

expect to come from this discussion panel?

Well, I’ll probably lead it off by talking about something which is really very

startling. We’ve just been through the biggest recession since World War II. Liquidations in

the UK are at a 30-year low, which is an incredible coincidence. You have to analyse why,

and it’s low interest rates, government support, through not collecting overdue taxes, and

banks because they’re either unwilling to recognise losses or prepared to really postpone

them into the future. All of those things mean that at the moment you can actually make a

rather unpopular argument that there’s an unhealthily low level of corporate failure, and that

the problems are being stacked up both in the economy and in the banks. That eventually will

break, and when it breaks it will be rather dam-like. The volume of deals to come forward will

be very large indeed; whether that comes in six weeks, six months, or a couple of years, I

don’t know, and that’ll probably be the subject of some animated debate. But those are

among the big issues.

Thanks very much for your time today, Jon. It’s been great to hear

your points and hear about how you operate at Better Capital!

Read more...