KPS’ Psaros Sees Long Recession Ahead

NEW YORK (Reuters) – KPS, a private equity firm specializing in buying underperforming or distressed businesses, expects the economy to be in a recession for three to four years, according to co-founder and Managing Partner Michael Psaros.

“This is obviously a supertanker economy. It slowly goes into a recession and it slowly comes out of a recession,” Psaros said during the Reuters Restructuring Summit in New York on Wednesday.

Psaros, whose firm invests in industrial and manufacturing companies, said he expects bankruptcies to rise at accelerating, quicker-than-foreseen rates as companies are unable to refinance the favorable loans they made during frothier lending times.

“We will see an increase in bankruptcies as we proceed through 2009,” he said, adding that in addition to technical defaults related to loan covenants, he expects to see companies default on payments due to the effects of the recession.

The bankruptcies will broaden from the financial sector to affect not just people’s retirement accounts, but the broad economy, he said.

“It’s stunning that Washington doesn’t get what is happening on Wall Street is not a little Wall Street phenomenon that affects people’s 401Ks. It has seeped into and will greatly affect the real economy on Main Street out there,” he said.

Psaros expects the firm to increase its investments in distressed companies as the economy moves further along in the recessionary cycle.

“In your first 12 to 18 months, generally what you see, from an investment perspective, is garbage,” Psaros said. He predicted that many of the deals done this summer “will not exist in a short amount of time.”

(For summit blog:

(Reporting by Caroline Humer; Editing by Dave Zimmerman, Phil Berlowitz, Richard Chang)