And it’s not just money that is at stake. When things go wrong, with jobs and pension plans on the line, investors can find themselves on the receiving end of a very public dressing-down as industry veteran Jon Moulton found after the collapse of courier firm City Link in 2014.
As a result, it can be difficult for investors to be comfortable with the strategy and there are only a handful of firms operating in this space in the UK. Only five UK-based turnaround funds have been raised in the past five years, collecting just €2 billion in capital, according to Preqin.
Dealflow has also been weak. A wave of activity was predicted following the 2008 global financial crisis but the opportunities failed to materialise. Moulton announced earlier this year that Better Capital would not be raising new funds because there was a dearth of opportunities. He blamed this on low interest rates and banks writing off loan losses.
Back to life
Yet there is a sense that the turnaround market is coming back to life. And for all its risks, it can offer outsized returns. Industry executives predict a wave of opportunities in the UK over the coming months, with the consumer and retail sectors providing the bulk of deals. These sectors, particularly retail, face several challenges that are affecting companies’ ability to make a profit.
Mike Jervis, a partner in the restructuring team at PwC, said: “Mid-market retailers seem to be bombarded on all sides.At the start of this year we said there were a number of crosswinds, particularly in relation to cost bases facing businesses in the retail sector.”
Jervis cited as causes for concern for many retailers the increase in the UK’s national living wage, which will rise each year up to 2020, as well as a shift in consumer spending habits and the impact of a hike in business rates.
A number of consumer brand names have gone under this year, including Austin Reed and BHS, while the Rutland Partners-backed Bernard Matthews went into administration in September. And lenders and businesses are bracing themselves for the additional stresses that the UK’s decision to leave the EU will bring.
The fall in the value of sterling and a likely drop in consumer confidence could ramp up the pressure. Jessica Clayton, head of retail restructuring at EY, said: “I think retail has been an embattled sector for some time and the pressures only look likely to intensify over the next 12 months. I think the pressure will start to ramp up from Q1 next year … Brexit exacerbates some of these existing pressures and adds additional pressures on consumers’ willingness to spend and increased input prices once hedging arrangements expire.”
This will result in “more opportunities for the turnaround funds next year”, Clayton said, before adding: “I can definitely see a pick-up in opportunities for turnaround investors. I’m seeing a lot of people looking at deals in this sector.”
Turnaround funds and their backers are ready to take advantage of the likely increase in opportunities – if they haven’t already been doing so. Alteri Investors, backed by Apollo Global Management, was set up in 2014 to focus exclusively on investing in stressed and distressed situations in the European retail sector.
Playing the game
OpCapita is another turnaround firm well positioned to take advantage of opportunities in the retail and consumer space. The firm, which has invested in UK video games company Game and electrical retailer Comet, raised €350 million in August 2016.
In the past 12 months, Alteri has acquired a number of high street brands including shoe retailers Brantano, Jones Bootmaker and clothing chain Austin Reed.
Post-Brexit, turnaround firms R Capital and Rutland Partners were understood to be interested in acquiring restaurant chain Ed’s Easy Diner before food industry tycoon Ranjit Boparan snapped it up through a pre-pack administration, according to media reports.
The Daily Mail reported on October 24 that private equity firms including Neuberger Berman, which owns fashion house Ben Sherman, and Rutland Partners were planning to swoop on French Connection, the struggling UK retailer.
Investor appetite is also picking up – suggesting a likely uptick in the amount of capital that turnaround funds will have at their disposal to deploy.
Garry Wilson of turnaround firm Endless said he expects “distressed funds will use it [Brexit] specifically as a fundraising tactic with LPs [investors]”.
Robinson at Valtegra said regarding the fundraising environment that “we’re getting wind in our sails off the back of Brexit and obviously people [investors] are interested in that discussion”.
The most active firms in the UK market
Rutland Partners The firm is currently investing from its £263 million third fund, which closed in January 2015. Rutland recently sold Millbrook Group in a deal that netted it six times capital invested. Its second fund has already returned over £360 million to investors, in excess of the £322 million it raised in July 2007. Turkey producer Bernard Matthews, another investment from its second fund, in September fell into administration and was sold on to food tycoon Ranjit Boparan, leaving suppliers millions out of pocket.
Alteri Investors An affiliate of Apollo Global Management, Alteri invests funds ultimately provided by the investment giant. The fund’s core objective is to invest in distressed situations in the retail sector across Europe. The firm has made several investments in high-profile UK retailers since it struck its first deal in April 2015. Alteri acquired Macintosh Fashion UK, which encompasses Brantano and Jones Bootmaker, in October 2015.
OpCapita The retail and consumer-focused turnaround firm closed its second fund on its upper limit of €350 million in August 2016. The firm has previously invested in several high street companies including UK video games retailer Game as well as electrical retailer Comet. Under OpCapita’s ownership, Comet fell into administration, putting 6,600 jobs at risk, leading to a spate of negative publicity for the firm. OpCapita had previously acquired the company for £2 from Kesa Electricals. Current investments include frozen food retailer La Sirena.
Endless The Leeds-based investor raised £525 million for its fourth fund in December 2014. The firm is one of the best performing turnaround funds operating in the UK market and its 2005, 2008 and 2011 vintage funds are all expected to generate multiples of three times cost or more, with internal rates of return in excess of 50%. Endless’s investments include Lancashire-based Bright Blue Foods, which is one of the largest manufacturers of mince pies and Christmas cake in the UK.