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Credit Crunch a Boon for Midmarket and Turnaround Firms
March 05, 2008

The Deal.Com

By George White

Frozen debt markets have left private equity firms sitting on billions in dry powder for megabuyouts, but downstream in the middle market, dealmaking continues apace. A panel at DealFlow Media Inc.'s Distressed Debt Conference 2008 took a look at how middle-market buyout and turnaround firms are adjusting to new lending standards and taking advantage of turnaround and fix-up situations.

"Because of the credit problems, companies that have been borrowing their way out of trouble without fixing the underlying problems have come to the end of that road," said John Collard of Strategic Management Partners. "I think you'll see a lot of private equity buyers with dry powder waiting to pick those up."

Insight Equity Holdings' Victor Vescovo chimed: "The best time to buy these assets is right now, when valuations are low; [unfortunately] some of the deals aren't in the ratios that the bankers need, so there is a tension between what you want to do and what you can do."

"The lenders do have capital; they're just very skittish about deploying it," Vescovo continued. "It's not that things are closed, it just takes a lot more work, and people have to be a lot more comfortable with the deal before it gets done."

Monomoy Capital Partner's Daniel Collin sees similar circumstances. "There's been very little change in our ability to finance [middle-market] deals; where there has been change is with the banks," he said. "We have seen a lot of change in the reaction of banks to bumps in the road for [companies needing financing]. They don't want to take on more risk; lenders are being less lenient in terms of their willingness to work with management."

Lincoln Partners' Ronald Kahn added that "there's still capital available for companies with Ebitda below $50 million, and the number of transactions is still pretty good, but the quality [of the deals] is down." Panel moderator Charles Riceman agreed, saying that his firm Golub Capital "couldn't be busier; our sweet spot is $5 million  to $20 million in Ebitda, and those are the deals getting done in this market." - George White