By Garry Wilson, Managing Partner, Endless LLP
"My bank manager has a glass eye. It’s the left one. I know that because it has a glint of humanity in it."
This is told to me recently by an executive from a buyout firm. One of his portfolio companies had just been on the wrong end of a restructuring in which the bank wiped out the private equity firm and installed a new management team. As the Head of Endless, I put his former case on my list of potential future deals. It is a list which currently extends to eight pages - if I use a very small font. Busy times you would think.
Earlier this month I sat on a panel at The Institute for Turnaround with senior guys from three bank workout teams. I looked across, did a rough calculation and estimated they held 600 equity stakes between them. A coffee afterwards revealed I was about a hundred shy of the real mark. That’s the equivalent of about thirty typical private equity portfolios. The title of the Panel session at the IFT was “Should Banks own businesses?” They unanimously agreed that they shouldn’t. I said they should. Confused? Yeah, me too.
In February 2008 my firm raised £164m to continue our prolific level of activity which started with twenty turnaround deals in our first couple of years. A recession and a financial crisis followed very quickly. "Maybe we should have raised more?” asked a colleague in anticipation of the impending avalanche of new introductions. I’m glad we didn’t or I would be on the defensive right now with my limited partners. As it happens we have not done too bad with ten deals in two and a half years but, like most other people I thought 2009 and 2010 would be time for the turnaround teams.
So what has happened? I blame 1991 when workout bankers were scarred for life by a wave of uncontrolled insolvencies and losses which were quickly followed by the further pain of watching the buyers of the bust businesses selling them on at super profits. A turning point was RBS’ recruitment of Derek Sach, a former 3i executive, intent on challenging the cosy relationship between bankers and insolvency practitioners. Insolvency statistics at RBS plummeted and Specialised Lending Services, now Global Restructuring Group, quickly became a division intent on creating value from troubled situations.
Other banks followed, some of them such as Barclays Business Support further refining the model and made ‘customers returned to good book’ a key performance indicator. The top brass in the bank workout teams now consist of seasoned restructuring bankers and former private equity professionals who have overseen more turnarounds and value creation plans than the whole of the private equity industry put together.
They are accused of creating zombies but in fact are carrying out “Brombis” (bank rollover MBIs) from the wreck of the “Colombos” (colossally overpriced MBOs) and doing very well out of some of them.
In most cases over the last two years, the value in any turnaround has been debt recovery for the banks, not equity value for funds like Endless. That is why I think they are the right owners for the time being. When will that change? The triggers for me will be increased interest rates, fresh cash needs from the Brombis that have not worked or a double-dip recession. In the meantime I will keep reducing the size of the font on my list so that I can keep it to a mere eight pages.
Like the last two years, I am sure I can squeeze 10 deals out, but don’t expect the turnaround market to lift off anytime soon.
Originally published in Private Equity News on 20 September 2010.