Turnaround funds eye European companies hit by Covid-19

Turnaround funds across Europe have raised at least $5bn in recent years in the hope of snapping up companies on the cheap amid any sign of economic downturn.

One executive from a large sponsor targeting distressed European retailers is upfront in admitting he has "real problems" at his own portfolio companies due to enforced store closures and supply chain disruptions, and touts his eagerness not to let the crisis go to waste.

"We think there's going to be some interesting opportunities," the fund executive says, citing his experience running recognisable high street brands across Europe.

"We will probably take a look at anything in retail and we are very flexible… and are completely agnostic whether debt or equity," the executive stresses.

Old hand in hard times
The turnaround fund is among many that are now dusting off their playbook from the global financial crisis over a decade ago, mimicking the flexible approach adopted by the likes of Apollo when it bought the highly distressed debt of chemicals giant LyondellBasell Industries over many months in 2008-2009 – to the surprise of other market players at the time.

When the Anglo-American company eventually filed for bankruptcy due its debt load and the financial crisis, Apollo was made the owner overnight. Under its ownership, the fund oversaw its restructuring and eventually listed the company in 2010. The fund pocketed $10bn overall when Apollo sold out its last shares in 2013.

Bargain hunters may also turn to the case study of UK retail turnaround fund Hilco, which acquired loss-marking UK furniture retailer Habitat in 2009 when it successfully negotiated for a €30m dowry from the Swedish seller Ikano.

Dowries will be in vogue once more, as desperate sellers look to further sweeten deals by absorbing liabilities or offering upfront cash, one restructuring M&A adviser says. Turnaround funds may even be able to take their positions having paid only symbolic prices, the adviser adds. "The truth is they will only deploy money if they really have to."

Distressed sectors
Consumer-facing businesses enduring a slump in demand amid the global lockdown will constitute a rich hunting ground for opportunistic investors. UK high street names such as Burger King, whose franchise is owned by Bridgepoint, and Mayfair Equity-owned Yo! Sushi are among those planning to withhold rents this week, in order to hold on to cash to survive.

Burger chain Byron, backed by Three Hills Capital Partners, and shoemaker Hunter Boots, whose sponsor is Searchlight Capital, have seen their key investors hire advisers to consider options for the businesses, according to reports.

Similarly, leisure groups could be the next in line for potential bargain hunters. Not only have they seen their revenues slump, but negative bookings through cancellation requirements and refund requests are further sucking up working capital, which can ultimately call into question their operations' viability, according to Nick Wood, M&A partner at consultancy AlixPartners.

Other sectors such as industrial companies could follow suit as the collapse in consumer sentiment will eventually cascade down into the likes of automobile parts manufacturing, among others, a Germany-focused M&A adviser says.

Financing stress
Any upshot in distressed deals could be met with a significant hurdle: financing.

Dozens of M&A processes have been pulled in the past few weeks, partly due to potential buyers struggling to raise finance at a reasonable cost, as reported.

Despite emergency interest rate cuts from central banks, some lenders continue to hoard cash and retrench from lending as they price in a global recession.

But, fortuitously for them, many turnaround funds have completed – or are in the later stages of – fundraising, meaning some sponsors will be able to offer all-cash deals while riding out the volatility.

"We're comfortable doing it ourselves first and then we could refinance later," says a retail investor who has recently closed his fund. "It's obviously hard to underwrite things at the moment."

Flush with funds
Turnaround players have raised at least $5bn overall in Europe over the past few years, proprietary research by Unquote shows.

Among the largest funds that could exploit the current crisis are London-based distressed fund Zetland Capital, which saw its first vehicle dedicated to European opportunities oversubscribed with €372m of committed capital versus an original target of €300m just last December.

The brave are just joining the fray. Italian alternative investment specialist Main Capital is launching a restructuring fund eyeing up to €250m in credit exposure to SMEs and targeting €40-50m to injection into its own portfolio companies, Unquote reported on 26 March.

If capital from North American sponsors with European investments in their mandates are added to the mountain of dry powder, it easily grows to double-digit-billion-dollar figures.

The most significant fundraise recently involved US-based Platinum Equity, which brought in £10bn for its fifth fund in January, comfortably above the £8bn target it sought. The fund, with an M&A track record in Europe, will focus on "complex transactions" globally.

Selection of turnaround funds active in Europe

Fund manager	Fund name (Vintage)	Final close	Final size	Fund deployment
Platinum Equity (US)	Platinum Equity Capital Partners V (2019)	Jan-20	$10bn	n/d
Brookfield Asset Management (Canada)	Brookfield Capital Partners V (2018)	Nov-19	$9bn	28% (as of Nov-19)
Ares Management (US)	Ares Corporate Opportunities Fund V (2015)	Apr-16	$7.9bn	67% (as of Jun-19)
KPS Capital Partners (US)	KPS Special Situations Fund V (2019)	Oct-19	$6bn	n/a
KPS Capital Partners (US)	KPS Special Situations MidCap Fund (2019)	Oct-19	$1bn	n/a
Centerbridge Partners (US)	Centerbridge Capital III (2014)	Oct-14	$6bn	60% (as of Dec-18)
TPG Capital (US)	TPG Capital Asia VII (2019)	Feb-19	$4.6bn	n/a
Carlyle Group (US)	Carlyle Strategic Partners IV (2016)	Jan-17	$2.5bn	43% (as of Jun-19)
L-GAM Advisers (UK)	L-Gam II (2018)	Dec-18	€772m	n/a
L-GAM Advisers (UK)	L-GAM Investments (2013)	Dec-14	€352m	n/a
Alchemy Partners (UK)	Alchemy Special Opportunities IV (2017)	Jan-18	£900m	n/a
Endless (UK)	Endless Fund IV (2014)	Dec-14	£525m	n/a
Blue Wolf Capital Partners (US)	Blue Wolf Capital Fund IV (2017)	Oct-17	$540m	n/a
Paragon Partners (Germany)	Paragon Partners Fund III (2019)	Jun-19	€780m	n/a
Zetland Capital Partners (UK)	Zetland Special Situations Fund I (2019)	Dec-19	€372m	n/a
OpCapita (UK)	OpCapita Consumer Opportunities Fund II (2016)	Sep-16	€350m	52% (as of Jun-18)
OpenGate Capital (US)	OpenGate Capital Partners II (2019)	Nov-19	$585m	n/a
CMP Capital Management Partners (Germany)	CMP German Opportunity Fund III (2016)	Apr-16	€250m	n/a
Perceva Capital (France)	Perceva Special Situations Fund II (2014)	Jul-14	€200m	n/a
Tikehau Capital (France)	Aerofund III (2013)	Dec-14	€150m	n/a
Fidelium Partners (Germany)	Fidelium Special Situations Fund (2017)	Jun-17	€103m	n/a
Sherpa Capital (Spain)	Sherpa Capital III (2018)	May-18	€150m	n/a
Tar Heel Capital (Poland)	Tar Heel Capital III (2018)	Nov-19	€100m	n/a
Elaghmore Partners (UK)	Elaghmore I (2016)	Dec-16	£60m	55% (as of Aug-19)
Quantum Capital Partners (Germany)	Quantum Opportunity Fund II (2018)	Jan-18	€77.5m	n/a
DUBAG (Germany)	Lenbach Equity Opportunities I (2017)	Dec-17	€50m	80% (as of Oct-19)

Source: Unquote Data

Timing the hunt
While upcoming deals could emerge "very quickly [...], it is still a little bit early to tell," AlixPartners's Wood cautions. "We've had conversations with a number of distressed funds already, although I haven't seen this massive wave of people saying 'what's in your books' just yet," he says. "But that's going to come, I imagine."

Instead, much of the immediate priority for these funds will be housekeeping, firstly understanding portfolio companies' liquidity positions and their business exposure to coronavirus before hunting for new opportunities, he adds.

"As we know, there's a lot of capital out there that's looking for deployment. But a lot of money can be lost in the environment as well," Wood says. "I expect to see investors seeking high levels of asset coverage and pursuing opportunities where there is reasonable expectation of significant upside through the recovery."

A German fund executive echoes the sentiment, predicting thatdistressed dealflow is likely to reach a new high in the third quarter "when we start to get a feeling that this thing might be over".

Opportunities could come about when companies will be forced to sell from liquidation situations following pressure from financing banks, he said.

But extra due diligence could be expected for any targets. "We won't be prepared to deploy until we feel that we have a good grip on the impact of coronavirus to individual companies and the wider economy," the fund exec said. "Perhaps this could mean finding sectors that can mitigate those risks."

This article was originally published on Unquote sister publication Mergermarket

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