This is the first edition of what I’m calling This Week in Distress. My goal is to curate & educate on 3 interesting items that happened in the world of private equity distressed investing, restructuring and bankruptcy. I’ll take them out of the world of legalize and highlight some key insights so that are quickly readable and digestible.
I hope you get a lot of value from this series…
$2.9T IN PRIVATE EQUITY "DRY POWDER" & A NEED TO DEPLOY THAT CAPITAL WILL CREATE A RUSH OF CAPITAL INTO DISTRESSED INVESTING
BDO’s Spring 2021 Private Capital Pulse is out & is yielding some interesting insights. The industry has had no problem in attracting capital over the past 60 months, which is a testament to private managers ability to deploy capital considering what COVID lockdowns did to the broader economy. Capital has doubled to $2.9 trillion which is now causing a demand for assets unseen in a long time with expected increases in assets up to 24%. Almost 50% of all fund managers knowing this supply/ demand relationship have stated their intentions to direct funds into distressed assets. In a post M&A situation, the 3 top areas of concern for PE managers are as follows (% concerned);
Revenue Enhancements (Pricing, New Products, Distribution) - 42% concerned
ERP Upgrades/ transitions to new systems - 40% concerned
Operational Improvements (supply chain, procurement) - 45% concerned
While typical deal flow comes through banking special assets, insolvency attorney and chapter 11/ 363 sale filings, the industry could look to other areas such as corporate divestitures and no succession planning as areas for deal flow.
As an LP, ensure that your GP has the abilities &/or team to address the 3 concerns above, are not overpaying for distressed companies just to get capital into the market and are not using remote work as an excuse to “take it easy” on due diligence. A good turnaround plan and a team to execute that plan, while ensuring no surprises arise after the deal is closed, will always be the key to successful distressed investing.
$AMC IS ALL THE NEWS RIGHT NOW BUT IS THERE A FUNDAMENTAL STORY TO PAINT FOR THE REST OF THE MOVIE THEATER INDUSTRY?
Memorial Day weekend was a “ramping back up” of movie theater crowds according to Jeff Goldstein, President of domestic distribution at Warner Bros. For the long weekend, total box office intake was close to $100M, the most since March 2020 with the release of long delayed movies such as A Quiet Place II.
It’ll be a long road back for industry fundamentals so is there signs of life occurring for movie theaters now? (we certainly can’t look to $AMC for any real guidance)
Lets take a look at some recent developments in the industry…
Alamo Drafthouse Cinemas emerged from chapter 11 bankruptcy, sold to the Fortress Investment Group who bought the company before the assets were expected to go to an Article 9 auction. They immediately announced plans to open 5 new theaters, a real vote of confidence for the recovery of the industry
IMAX had it’s biggest weekend since 2019, a welcome sign since Q1 2021 was the worst quarter of operational cash burn since the pandemic at $10M. A cash balance of $317M and technology that generates a movie watching experience that can’t be replicated with “Netflix & chill” should give the company enough runway to get back to reliable profitability. The movie theater chains are likely to overemphasize IMAX to break the habit of at- home movie watching.
PRIVATE EQUITY USING LBO's AT LEVELS NOT SEEN SINCE 2007. WHAT COULD THIS MEAN?
According to a Mckinsey & Co report from April 2021, private equity companies are paying almost 40% more for $1 of EBITDA then they did 10 years ago. The hunt for yield for non-distressed assets could actually be a catalyst for more distressed assets.
Why? Companies acquired by Private Equity are carrying 7 times more debt then the EBITDA they are able to generate in a year. Low interest rates are the major reason why funds are closing deals with record levels of Debt/EBITDA ratio, not even seen during the excesses of pre-2008. On top of the overlevered balance sheets, the industry is taking on too much risk for 2 major reasons that should put fears into any LP…
Most debt are going into acquiring technology companies (see the $3B acquisition of Bumble) - I expect a company like Heinz to be around with predictable cash flows in 10 years but another dating app? (btw - this deal did work out well for Blackstone but I would still be cautious with high debt & a high risk of obsolescence)
If low rates are the catalyst for more LBO activity, then the impact of real inflation that we all feel on a daily basis at the pump or at the grocery store (not always captured in CPI measurements) may force central banks to rethink their low rate policies. Even 2007 funds didn’t have to face a graph like this…
If you liked this bite sized amount of content on 3 news worthy items I found interesting in the world of (distressed) private equity, give this article a LIKE and I’ll be happy to make it a weekly quick read.