Panel: Distressed opportunity evolves with market

Private equity distressed players are finding good returns by helping to capitalise small, distressed businesses, and by scouting for buyout-backed companies being groomed for exit.

Private equity distressed teams are finding good returns through providing capital to small to mid-sized distressed companies that can’t get access to the high yield market.

“That opportunity is fantastic. You’re getting paid a huge premium for illiquidity right now,” said Jason New, co-head of distressed investing at GSO Capital Partners, the debt investing affiliate of The Blackstone Group.

New was on a panel of distressed investors at a conference in New York Thursday talking about evolving opportunities in the market.

Investing in smaller companies that have no access to the high yield market can generate “meaningful” premiums starting at 1000 basis points and up, New said.

Another area of focus for private equity distressed investors is banks and other traditional lenders that are feeling pressure to get rid of assets that “don’t fit well within capital guidelines”, according to Michael Paasche, a managing director with the capital markets group at Providence Equity Partners.

Everyone will try to extend and amend and hope the fundamentals will improve, and if [things don't improve] they'll have to take more aggressive decisions to restructure.

Peter Cecchini

New, of Blackstone, said the power sector will become more of a distressed opportunity in the next few years, and he said GSO is focusing on “cyclical” businesses like homebuilders.

The panel also discussed the massive amount of recapitalising that has taken place.

“Everyone will try to extend and amend and hope the fundamentals will improve, and if [things don’t improve] they’ll have to take more aggressive decisions to restructure,” said Peter Cecchini, chief strategist and head of special situations at BCG Partners. “A lot of companies haven’t been forced to do the hard thing.”

Delegates on a separate, off-the-record panel talked about the reemergence of debt instruments popular during the credit bubble. The panelists said private equity firms have been pushing recently for higher leverage levels.

A few months ago, you’d get one call a week asking, “would you do a 6x leverage deal. Now it’s two or three calls a week,” according to one panelist.

Before the Greek debt crisis rattled European markets, private equity firms were starting to look for financing terms that resembled those from 2007, one panelist said.

“That’s something that the recent weakness in the market will hopefully pull back on,” the panelist said.

Private equity can provide a great opportunity for debt-focused investments as they try to sell off investments made during the credit bubble, one panelist said.

Many of those firms are planning to hit the fundraising trail soon, and need to return some capital to their limited partners first.

“Companies that are in those funds are for sale, and a lot of their debt trades at a discount,” the panelist said. “There’s a fuse on some of these companies because some of these guys are going out for fundraisings.”