From retail to consumer cyclical to restaurants to automotive to financial services, the number of business restructuring announcements has increased. Stock prices have plummeted. Margins are being squeezed. The signs are all around us: excess leverage, operating losses, weak management and strategy or operations not built for a downturn. Now may be the right time for investing in distressed.
There are several ways for astute investors to invest in distressed opportunities while helping to alleviate some of today's turmoil. Examples include: purchasing debts of distressed companies, providing financing to companies that lack bank options―perhaps utilizing a "loan-to-own" strategy, investing in private equity turnarounds and buying into section 363 (asset sale) bankruptcy pre-pack transactions to name a few. While these options offer significant opportunities for solid returns, the control positions offer higher rewards, albeit with potentially higher risks.
When dealing with distressed, you are either in or out. Experienced players know the stakes are high and the level of return may hinge upon solving a multitude of a target's operational and strategic variables. Funding and liquidity constraints, financial reporting issues, high turnover and the lack of formal controls are often associated with distressed companies; therefore, interested players must have the proper turnaround talent, process and infrastructure to evaluate, plan and manage such investments.