Restructuring Opportunities – Will Bad Investor Decisions Lead to Growth for Advisors:
By Allen Wilen
Posted: 15th August 2018 09:59
With liquidity at an all-time high, we are experiencing an unprecedented period in the history of business investment. Corporations and Funds have mountains of dry powder, yet we hear sentiments from executives, investors and lenders alike that the quality of deals continues to decline. With the ever-increasing pressure to deploy capital and win deals coupled with a collapsing structure and thinner margins – it is only a matter of time before the restructuring community is buzzing again.
In the current environment, how plentiful are the opportunities in the restructuring and distressed space?
The opportunities are there. It just requires a creative approach to source and close these transactions.
Opportunities exist not only in our traditional and mature markets and industries, but also within new industries that have only been recently created. For example, in the United States, the cannabis and drone industries have had significant capital invested, platforms are being created, and opportunities will exist to roll up or loan to own in these markets. Oftentimes in new industries, the third or fourth round of capital is the one that is rewarded and not the initial rounds. The current market is also impacted by new U.S. led tariffs being imposed on commodities such as steel, aluminium and alloys, and on countries such as China. These tariffs will have unintended consequences for U.S. allies, and trigger reciprocating tariffs of U.S. products. All the while NAFTA renegotiations are “far from being complete” according to the U.S. Commerce Secretary.
Some of the only people who come out ahead in a trade war are the Restructuring Professionals and Investors who can see past the short-term impacts and wait out the ultimate revision to the “new” norm. These opportunities exist both domestically and internationally for investors in the case of a trade war. Trade wars create inefficiencies in the markets and allow governments to arbitrarily pick winners and losers. Winners are well capitalised companies and organisations. The losers tend to be highly leveraged businesses. Those that thrive have the resources to sustain. Those that are troubled are stretched to the limit. The shock of a tariff and its impact of sales and operations can be dramatic. I expect that there will be lenders whose position on Asset Based Loans goes from a very comfortable cushion to being over advanced within weeks or months.
I have been asked: What industries and markets are you forecasting opportunities will arise? I always answer that with the following: “Does industry or market really matter?” As an investor, you are always seeking the market advantage. Either you can grow the business better or you can cut costs quicker than the prior management team. If you cannot accomplish either of these, then why would you pay up for this business in today’s market?
It starts with “the wedge.” Is the gap between the bid and ask large enough? If it is, there is opportunity. If not, investors and lenders will inevitably get into trouble. They pay more for a business than it is worth because they WANT or NEED the deal, not because it makes economic sense. They have stakeholders to answer to. If the money isn’t put to use, a great fear is that it will be made available to other competitors.
Ask yourself the following questions about a business. If you cannot get past this short list of six questions; don‘t invest.
- Does the business provide something that is unique and highly sought after?
- Can the business separate itself from competitors and be a market leader?
- What do you possess that makes you a difference maker to this business?
- Does the business have a long runway for your plan to take effect?
- Are there any tax advantages provided by the business?
- Can you exit cleanly if you wanted out of the investment?
I am sure you noticed I did not ask about geographic location. A good business exudes the same fundamentals whether it is domestic or international, why limit yourself to a smaller pool of quality opportunities?
A Final Thought
Competition for quality deals has rarely been tougher. This underscores the need to think smarter, be more creative, and look for deal flow somewhere other than in your local market. Those that can implement and execute on this strategy will be positioned to be successful.
Fortunately, for the Restructuring industry, many investors will still buy businesses for which they cannot answer my six questions above, or fall in love with a business and overpay for an opportunity that cannot be a success from the start. The pressure to stretch always seems to resonate more than patience.
Allen Wilen is a Partner and Leader of EisnerAmper’s the Financial Advisory Services Group. He is a Certified Public Accountant, a Chartered Financial Analyst, a Certified Insolvency and Restructuring Advisor and a Certified Turnaround Professional. He is EisnerAmper LLP’s Financial Advisory Services Practice Leader and is responsible for EisnerAmper’s international restructuring, insolvency, forensics and valuation practice. Allen can be reached at firstname.lastname@example.org or (732) 243 - 7386.