Hedge Funds eager to offload previously Bankrupt Companies and Brands
Buyers could soon see a rise in the number of formerly distressed businesses across different sectors coming onto the market as hedge funds and other distressed debt investors look to offload.
Many hedge funds sought to buy businesses out of bankruptcy during the recession. According to Reuters, which spoke to several investment bankers on the subject, a number of hedge funds are looking to sell their formerly distressed company purchases in the coming months in order to cash-in on the economic recovery and offload the riskier elements of their portfolios.
Major brands are set to be among the firms that could be sold in the year to come, claim the bankers – many of whom opted to remain anonymous. One explained how many of the firms bought out will benefit from the strategy: "There are some great brand names that are being rehabilitated and re-purposed into healthier companies. There will be demand for them when they come off the shelf."
The hedge funds that opted to buy struggling firms during the recession are likely to be looking for quick exits to save money. David Resnick of Rothchild’s Global Financing Advisory Group told Reuters: "They're measured by their return on their investment, so they are very sensitive to getting something done sooner rather than later. "
The auto, media, chemicals and technology industries are all also expected to see an upswing in the number of formerly bankrupt firms heading to the market once more – boosting the number of mergers and acquisitions in these sectors.
Bankers expect media firms including Source Interlink, which was bought out of bankruptcy by JPMorgan Chase; and Vertis Holdings, supported by Avenue and GE Capital, to possibly be among the first media companies to be sold. The analysts claimed that these and other media players, who were saved by hedge funds, could represent strong opportunities for repackaging and reorganization.
Meanwhile, in the auto industry, Dura Automotive, which was taken over by Lear Corp. and Patriarch Partners, could be sold within two years. Analysts also claim that Delphi Corp., now owned by several funds including Elliott Management and Silver Point, is planning to launch an initial public offering in the near future.
So why are hedge funds much more likely to buy firms out of bankruptcy than corporate buyers? This is mainly due to the non-strategic nature of the purchases, the level of risk involved and the fact that hedge funds have more strength behind them to allow them to turn businesses around and put them back on the market quickly.
The reorganization of a bankrupt firm does present some huge opportunities to create value, but also carries greater risk for the purchaser. The process may involve closing plants or unprofitable divisions, which inevitably carries repercussions in terms of dealing with workers and unions. Mr. Resnick explained, "There's value received if you are willing to enter a complex, contentious situation. Some people say that the value they'd be getting just isn't worth it."
However, there is, of course a positive side to buying bankrupt firms, such as the fact that the circumstances around the bankruptcy will usually create downward pressure on the asking price. Oftentimes buyers are also protected - through federal court orders - from certain liabilities and claims associated with assets. Of course the due diligence process should not be compromised just because the business has been turned around by a hedge fund or private equity firm.
It seems that in light of the risks involved for corporations looking to buy bankrupt firms, buying a previously distressed brand from an exiting hedge fund could offer the perfect middle-ground that many buyers will be looking for.
