On Loan-To-Own: PE Pros Are Slow-Moving, Distressed Debt Investors Are Gunslingers

At today’s Private Equity Analyst conference, John Howard, CEO of Irving Place Capital, and Bela Szigethy, Co-CEO of Riverside Company, commented on a recent favorite of private equity firms, vulture deals (a.k.a. distressed loan to own):

Howard detailed his firm’s experience dabbling in the investment style with its recent acquisition of Chesapeake Corp., a bankruptcy packaging company:

We did our first distressed debt deal this year. We liked a Goldman Sachs company (Chesapeake Corp.) that was for sale, but we walked away because it wasn’t priced properly. We ended up taking a position in the company’s debt, which led to us owning the company out of bankruptcy. We partnered with Oaktree Capital because we aren’t well-versed in investing in debt.

One thing you learn is that the people who are good at distressed trading are different than the people who are good at private equity and that’s why we brought in Oak Tree. People in the distressed debt world look at us as anal and slow-moving and we look at them as gunslingers. You need to do the work you need to do but also buy the securities and have flexibility in your fund to even do the distressed debt investing. We are focusing on this as a way to do deals. The only negative is that the debt markets have come back significantly but we think there will be a second leg.

(Moderator asks if there is a second leg coming in distressed debt markets.)

We believe there is a whole wave of companies that have problems that have been able to put band-aids on, but at some point those wear off. The dilemma for us is how to get enough information on the companies before we invest.

(Moderator asks if there is more potential for players to team up with distressed players.)

Yes, it was a great partnership, they brought skills we didn’t have and we brought skills they didn’t have.

Szigethy discussed a few similar situations Riverside has met but didn’t materialize as deals:

It’s very hard for (lower middle market investors) to buy distressed debt securities and turn them into portfolio companies. We have, however played fireman, chasing after companies heading downhill rapidly. It’s just a question of going in and taking over the whole situation quickly.

In one case, we are the proud owners of a fireplace manufacturer. We chased after a competitor that was suffering from more distress than our company was. We bought the company because we knew a lot about the industry.

In the mattress business, we chased after a target very hard. (Ed note: That’s Spring Air, which peHUB reported on in May.) We put a team of 8 people on it and were in position to buy it, but we decided not to go forward. That playing of fireman will likely lead to a few deals for us for a few years.