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Distressed assets

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The economic slowdown and liquidity freeze has put a strain on portfolio companies, increasing the fear of bankruptcies. In the US, where the credit crisis has hit the hardest, the list of private equity-backed companies filing for Chaper 11 is growing quickly. Some very notable firms, including Kohlberg Kravis Roberts and Warburg Pincus, have seen some of their portfolio go down this route. Even if the story in Europe and especially the Nordics is different, investors are getting nervous that the economic slowdown will hit businesses here as well

Private equity's winning argument has always been its ability to improve the operational efficiency of portfolio companies. However, at the largest end of the scale this has not always been the case and returns have mainly been driven by leverage and multiple arbitrage. In the bear market that is expected to last through 2008 and beyond, it will become evident who has been hiding behind leveraged recapitalisations. Tighter covenants, slower growth in some sectors and little leverage available to complete recapitalisations have put pressure on buyout houses to focus on the operational side to build returns for its portfolio companies.

Thus, the current situation may require private equity firms to engage in specialist restructuring strategies to ensure success. The key to victory is to be proactive and take the bull by its horns before troubles emerge.

The Nordics are still one of the best performing regions in Europe, but whether this is due to clever business strategies or a lag in the market before the credit squeeze kicks in, is still not clear. But what seems clear is that many private equity firms will have to focus harder than before on the operational side of portfolio companies to be able to deliver strong exits, and thus keeping investors content.

Yours sincerely,

Linn Ronning

Nordic Editor, unquote"

Tel: +44 20 7484 9824

linn.roenning@incisivemedia.com.