Michael Psaros: You Must Be Kidding Me With This Recovery

Dow Jones served up a great lunch to end its Private Equity Analyst Outlook 2011 conference today. There was the tangy, crisp salad and hardy rolls, moist salmon with rice and veggies, and a yummy sort of crème brulee-topped-with-cream type of dessert.

I’m glad I finished before KPS Capital Partners head Michael Psaros gave the keynote speech to conclude the event. Frankly, it was pretty depressing.

The always candid Psaros, who could enliven any drowsy post-lunch PE conference crowd, offered a heavy dose of warning to a cautiously optimistic deal community.

While conceding there’s been some stabilization in the economy, the self-described “full-body contact” turnaround artist, who compares his firm’s investment style to the way his beloved Pittsburgh Steelers destroy opponents, said, “I think this market is way ahead of itself with this recovery.”

Sounding like the narrator for an apocalyptic movie ad, Psaros rolled off a few reasons why: “What happens when the Fed pulls out of this economy?” he asked. “Housing is a disaster,” he reminded us. Much of the population is in danger of being unemployed for a really long time. Food and fuel prices are rising. States and municipalities are broke. And then all these new health care and financial regulations?

“If you roll all that together, I’m not so sure happy days are here again,” he said, as a few forks came to rest on half-eaten desert plates.

Even though KPS Capital’s portfolio companies doubled profits in 2010 over 2009 numbers, hiring was anemic. “We can ramp up production dramatically and not hire anyone, and that’s a tragedy for America,” he said.

Of course, this is what you might expect from the head of firm that specializes in buying up under-performing companies and corporate orphans. Not surprisingly, Psaros sees plenty of opportunities for KPS Capital in 2011.

The firm is spending most of its time targeting struggling companies owned by hedge funds and other “unnatural owners” without much experience running successful companies who gained control by converting debt to equity stakes. Corporate divestitures are also on the rise, he said.

And over the next couple years, Psaros said there will be plenty of Chapter 11s because firms can only refinance—“delay and pray,” he calls it—for so long. “There will be a day of reckoning,” Psaros said. “The question is when?”