The long, painful process of forced liquidation of assets by Fannie Mae (FNM) and Freddie Mac (FRE), Lehman Brothers Holdings (LEH), and American International Group (AIG) is just beginning, but already market observers are trying to figure out where the vulture capitalists who typically swoop in to take advantage of such distress are training their attention.
Investors in distressed assets know from experience that it's better to wait until the cycle matures a bit before stepping in to buy anything, says Jeffrey R. Manning, managing director at Trenwith Securities, a Costa Mesa (Calif.)-based boutique investment firm that offers advice to companies going through bankruptcy.
"The weakest in the herd goes down in the early part of the cycle and by the middle of the cycle, you start to see pretty strong companies forced to file for bankruptcy," he says. (Many healthier firms wind up filing to remain competitive with peers that have already done so, as they have a more advantageous cost structure.) "That's where the better values are."
Time to deleverage
Vulture capitalists do best in situations where the value of target companies has been allowed to decay over an extended period of time, as opposed to the sudden meltdowns seen in the financial sector, says David Astorino, who leads the Management Due Diligence Practice group at RHR International, a management consulting company based in Wood Dale, Ill. Slow decay gives private equity firms more time to do due diligence tests to be sure of what they're really buying and to marshal the financial resources needed to make the deals, he adds.
With the entire financial system in shock, and firms trying to decide what to do about their balance sheets, it could be anywhere from 30 days to 12 months or longer until the necessary deleveraging is completed, says Manning at Trenwith.
Wilbur L. Ross Jr., the billionaire investor with a long track record of betting on distressed companies, told BusinessWeek on Sept. 17 that he thinks banks will be very badly affected by the Wall Street meltdown and therefore should present strong opportunities for vulture investors. Earlier this year, when the financial guaranty sector came under pressure for exposure to subprime mortgages, Ross injected $250 million into Assured Guaranty (AGO), wagering that the bond insurer would be in a good position to buy up some of the weaker players likely to fold because of risky credit investments.
1,000 banks could fail
His most recent involvement with bank turnarounds has been in Japan, but Ross points to his experience restructuring U.S. banks during the banking crisis in the late 1990s, when he ran a private equity fund within Groupe LCF Rothschild. "We're comfortable about banks and we have a joint venture with John Kanas, who built up North Fork Bank from a little tiny $20 million in deposits to $60 billion deposits and then sold it at the top of the market." he said. "So we feel we have the people to deal with the banks."