The opportunity for investors to make great returns in distressed debt plays has passed, according to George Roberts, co-founder of private equity giant Kohlberg Kravis Roberts.
“There’s no more opportunity in distressed debt,” Roberts told the Washington State Investment Board at the board’s meeting earlier this month. “To the extent folks have raised funds to go do that, people are going to have a very hard time getting that invested.”
Roberts was at the meeting with Mike Michelson, co-head of the firm’s North American private equity business, to provide the pension with an annual update. PEO reviewed a recording of the meeting.
Roberts also told the pension board that capital markets had recovered from their frozen state in much of 2009, and buyout deals, even large transactions, were again possible.
Private equity is a “cyclical business”, and there are times when firms can do large deals, and other times when the capital markets aren’t as friendly, Roberts said.
“[Private equity] is going to evolve as the economy does and as the credit markets do,” he said. “It’s incredible what’s happened recently. Although nothing has really happened, the banks are willing to lend again. You could probably do a $10 billion buyout today.”
A KKR spokesperson clarified that Roberts comments on distressed debt were referring to “buying good companies [on the cheap] in distressed-for-control turnaround situations”.
“The easy money is gone and now people will only make money through hard work and proprietary sourcing, creative structures and the ability to improve what they invest in,” the spokesperson said.
KKR has recently formed a team to target distressed debt, bankruptcy loans and rescue financing. The distressed team is being run by Nathaniel Zikha, who moved over from KKR’s North American private equity group, and Jamie Weinstein.
At the time the team’s creation was announced, Bill Sonneborn, head of KKR Asset Management, which houses the distressed team, said, “globally, even though the economy has gotten a bit better, global deleveraging is going to continue. There’s a substantial amount of covenant lite debt yet to mature carried by zombie businesses”.
The KKR distressed team has at least $800 million to invest, according to KKR’s registration filing with the New York Stock Exchange.