Most PE investors are highly reluctant to chase companies that are experiencing financial distress. As such, this eliminates a large number of opportunities ("good companies") that otherwise may be attractive investment targets.
This reluctance is very understandable—at least on the surface. These situations can offer all the drama of a Hollywood movie. One of our partners who specializes in this type of situation describes arriving on Day One and finding a CEO with a restraining order, being confronted by U.S. Marshals and even the DEA with search warrants for fugitives in the plant.
And, then there are the various "hoops" that have to be navigated as the company teeters on the brink of bankruptcy. These are primarily related to the "know how" involved in managing against the legal landscape.
Interestingly, however, as in most things—these "scary" obstacles turn out to be nowhere near as troublesome as they appear on the surface and can be managed.
Some of the key "rules of the road" involve the following:
1. Centralize power and "lock down" cash.
2. Be mindful of your obligations—to all stakeholders, including creditors and employees, in addition to the equity owners of the company.
3. Be decisive. There is an immediate need to "triage" the situation—make decisions.
Grounded in such an approach and with experienced partners, it turns out that distressed situations can actually be highly manageable. By being open to considering companies approaching financial distress, the universe of potential deals becomes dramatically enlarged. Thus the opportunity to access deals on a proprietary basis.
With the potential for economic slowdown right around the corner, "Good Companies, with Bad Balance Sheets" may provide a rich set of new prospects for deals in 2016 and beyond—for those investors who are willing to embrace the opportunity.
Jay Lucas is the Chairman of The Lucas Group, a management consulting firm specializing on the needs of private equity investors: firstname.lastname@example.org
This article represents the views of the author only and does not necessarily represent the views of PitchBook.