Turnarounds expect deal flood post-Olympics

Kimberly Romaine
13 June 2012

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The Diamond Jubilee and Olympics are detracting from private equity activity, though banks could at last be ready to sell their equity investments. Kimberly Romaine reports

Turnaround specialists have been rubbing their hands in anticipation of a swathe of activity for years now – to little avail. In fact, £1.8bn of turnaround activity across 111 deals in Britain was recorded in 2008, the year Lehman's collapsed, but this plummeted to just £146m last year across 21 transactions, according to BVCA figures.

Record low interest rates combined with inflated vendor pricing expectations have been touted as the culprits behind the lack of turnaround activity, but this may be about to change.

"Banks don't want to replicate the mistakes they made in the 1990s, when they sold assets too cheaply," points out Garry Wilson of Endless (pictured), alluding to the last time banks found themselves unintended equity holders of businesses they had lent to. He was speaking at a roundtable on distressed debt hosted by restructuring specialist FRP Advisory on behalf of the Turnaround Management Association.

Wilson continued: "They thought in 2008 that they'd be better off by 2011, and so held onto their assets. But now many realise they are actually worse off. The mood has therefore changed, and in the last six to nine months we've noticed banks are feeling stressed. We will see some opportunities from this soon."

Indeed earlier this year, Electra Private Equity invested £45.5m in Park Resorts to acquire 25% of the capital structure through purchasing the debt off the incumbent banker. A refinancing scheduled for autumn 2013 should see Electra take on a larger equity stake (it currently has around 5%) and may see the incumbent GP GI Partners exit the troublesome investment.

"Everyone thought in 2008 that banks would sell sound assets for a song, but it did not happen – the banks are very focused on value," Electra's Alex Fortescue told unquote" at the time. "That said, there are now deals to be done. Management teams are tiring and need re-incentivisation, and perhaps that is helping to free up some opportunities."

Also this year, Electra teamed up with Chamonix Private Equity for the £62m acquisition of property management services company Peverel Group from administrators Zolfo Cooper. The deal reduced the company's debt from £125m to £25m. Peverel had been in administration for a year after it was unable to arrange repayment with previous debt provider Bank of America Merrill Lynch. Chamonix and Electra took a substantial majority stake, while current management retained a minority stake.

"Banks look at equity not as equity, but as converted debt. This makes them poor owners of businesses," says Adrian Doble, a partner at FRP.

This means opportunities are on the horizon, but the general consensus is that the UK market will remain quiet until Q4. "The first quarter was fairly active, but it has been quiet since," says Frank Morton of Gordon Brothers. "People won't make difficult business decisions until after the Olympics."

This view was backed up by Andrew Busby of HIG: "The UK is very patchy now. The Jubilee and Olympics have caused a hiatus in the UK that will last until the end of the year."

HIG, incidentally, opened an office in Madrid in February. Hilco, another distressed investor, also opened in Spain this year, highlighting the prospects investors feel the country offers.