Having spent the past 18 years at SB360 Capital Partners (formerly SB Capital Group), I can say with certainty that the turnaround industry has evolved. What surprises me most is how we have been forced to change our own industry, even though at times it didn’t seem broken. But if you think about it, it should come as no surprise. The companies we serve are constantly changing, and we need to evolve with them.
In thinking about this edition of the JCR, I wanted to bring together a group of industry veterans who have been through, and are currently going through, the evolution of our industry.
From a retail company’s perspective, there was a time when assets like inventory, real estate, credit card receivables, and brands were hoarded as treasures to be prized and monetized. Today, technology has allowed companies to introduce tight inventory controls, direct-from-vendor drop shipping, showrooming, customization, and scan-based purchasing and therefore keep fewer assets on hand. Today membership or subscription models, which are the darlings of Wall Street, are coveted as new revenue models.
But are these new business models really disrupting traditional retail businesses, and is there life after a bankruptcy? In “The Retail Apocalypse: Fact or Fiction?” Michael Sullivan of Second Avenue Capital Partners explores the everchanging retail industry and life after a restructuring.
The very nature of how new industries and new companies are formed will affect how financial institutions lend to those clients: how those loans are structured and what covenants are required; how that collateral is valued and eventually monetized; how technology is utilized and work skills change; and what expertise is needed to restructure a failed business model that couldn’t pivot fast enough.
Finding value in these failed businesses requires a fresh look at operations and underlying assets and the role of a turnaround professional, as discussed in the following two articles: (1) Stacey Schacter of VION examines “Self-Liquidation vs. Sale: The Fallacy of Net Gain;” and (2) Lee Diercks and Patrick Diercks of Clear Thinking Group look at specific case studies that explore how “Turnarounds Require Patience, Partnership, and Professional Expertise.”
Until recently, banks that provided financing have been the driving forces behind most turnaround and restructuring processes. But this is changing. The restructuring of nonperforming loans is becoming increasingly difficult for banks, as holding onto the loans places increased pressure on their balance sheets from regulators and compliance oversight. The changed landscape, however, represents an opportunity for alternative investment funds, which possess a large amount of dry powder and an appetite to take over and restructure the loans. Sachin Sarnobat of Atalaya Capital explores this new paradigm in “Special Opportunity Investing in the Middle Market.”
The nature of a changing economy exerts constant pressure on our industry to evolve. For almost a decade, artificially low interest rates and frothy credit markets have made cheap money ubiquitous. As credit markets begin to change due to higher interest rates and overleveraged consumers, this is changing how distressed mergers and acquisitions are being viewed and structured. Matthew Arden of SSG Capital Advisors LLC delves into these changing times in “What the Current Credit Market Means for Distressed M&A.”
I hope these articles are thought-provoking and enlightening and stimulate discussion on the evolution of our industry.