Caution urged as private equity turnarounds loom

Date: Thursday, December 11, 2008
Author: Simon Meads, Thomsonimnews.com

Northern Trust's Morgan signals big opportunity to buy secondary private equity assets from his peers throughout 2009.

Private equity firms specialising in turning around distressed companies will need to show restraint next year, the director of Northern Trust's private equity division said.

Robert Morgan, who leads a funds of funds business with some $750 million of assets under management, said funds will need to carefully assess the longer term prospects for a growing number of targets in an unpredictable economy.

'As long as they don't move too fast and are patient, they are finding some nice opportunities and they will end up doing well,' he said.

Morgan said his firm had invested in a number of 'distressed for control' funds -- which tend to stay involved for longer than a traditional distressed asset fund -- in the last one or two years. He describes this relatively young sector as a 'different way to access deals than through the traditional buyout route'.

As the economic climate has worsened, distressed investment specialists have seen increased demand from investors switching out of traditional buyout funds. Oaktree Capital Management recently said it has raised about 1.8 billion euros ($2.33 billion) for a fund targeting hard-hit companies in Europe, beating its original target of 1.25 billion euros.

Other distressed specialists, meanwhile, are already finding targets, with the likes of Hilco and Sun Capital Partners being linked with potential investments in troubled British retailers Woolworths and Land of Leather.

OPEN TO OPPORTUNITY

Northern Trust's core focus remains picking leading managers in the small mid-market buyout field in the U.S. and Europe -- those with funds smaller than $1 billion doing deals in the $50 million to 500 million range.

While he acknowledges some portfolio companies may be more affected by recession than their larger rivals, Morgan believes those with the strongest capital structures and the best relationships with the banks will be able to emerge stronger.

'The good firms see this as the opportunity to buy their weaker competitors or build market share when other firms are playing defence. As long as you are not held hostage by your lenders there's an opportunity to play offence in this market,' he said.

Morgan said he also believes there will be a big opportunity to buy secondary private equity assets from his peers throughout 2009 as forced sellers look to offload their participations in funds at a discount.

'We don't really go by the 'anything's a good deal at certain price' philosophy,' said Morgan, who urged caution about investing in funds whose portfolio companies are highly-leveraged and have declining revenues.

'We want to make sure it's with a good firm we know, where the metrics make sense for our investors.'

Northern Trust also sees opportunities to continue to make good returns from funds providing start-up capital, traditionally seen as the riskiest end of the private equity spectrum.

'We think of some of largest companies that trade in healthcare or technology and used to be venture capital backed - and we think venture capital will continue to create those kinds of companies,' said Morgan.

($1=.7732 euros)

(Editing by Mike Nesbit)