WASHINGTON (AFX) - A new survey indicates a marked increase in hedge-fund and private-equity involvement in corporate turnarounds, but a pronounced decline in both in-court and out-of-court restructuring work for turnaround professionals.
More than 200 turnaround, financial-advisory and consulting firms that took part in the Turnaround Management Association's 2006 Trend Watch poll reported a spike in inquiries for services from private-equity firms and hedge funds in 2006. The survey shows 35 percent of respondents named such investors as sources of business, up from 13 percent in 2005.
'Private-equity firms and hedge funds are controlling an increasing number of middle-market companies,' said Colin Cross, president of the TMA, a 7,100-member nonprofit dedicated to corporate renewal and turnaround management.
The survey, released Thursday at the association's annual convention in Orlando, Fla., also highlights the effects of the tide of easy money available to troubled companies. Restructuring work involving bankruptcy filings declined, along with out-of-court restructuring work.
Respondents who said that at least half of their work involved in-court restructurings dropped to just 17 percent in 2006, down from 31 percent in 2005. At the same time, just 28 percent of respondents said at least half of their work was on out-of-court restructurings -- a decrease of 13 percentage points from 2005.
Even so, restructuring professionals said they expect a surge in restructuring activity by the end of 2007. In preparation for that surge, 37 percent of the survey respondents said they added employees in 2006, an increase of five percentage points over 2005. And 35 percent said they intend to increase the number of employees with such professional certifications as Certified Turnaround Professional.
The seemingly endless flow of financing to troubled companies is largely to blame for the decrease in restructuring work, as companies are able to skirt Chapter 11 by borrowing more money. But this year's drop may also reflect creditor-friendly changes to the Bankruptcy Code that took effect in 2005.
'The shift in the Chapter 11 process means there will be less time to fix a business inside a court proceeding,' said TMA Chairman Holly Felder Etlin.
Bankruptcy law changes that limit a company's control in Chapter 11 by imposing new deadlines are making early intervention a necessity for troubled companies.
'The skills to do operational turnarounds on companies in early decline stages will be very important,' said Etlin, a principal at XRoads Solutions Group in New York.
Further, turnaround professionals, who've traditionally made their money fixing companies struggling financially or operationally, are also snagging work from healthy companies. The survey found that 22 percent of respondents were getting half or more of their work from healthy companies.
Firms also reported brisker business in 2006. Nearly half of the respondents said engagements have increased over the past 12 months, while 29 percent saw a slight decrease. In 2005, 42 percent reported an increase in business.
The Web survey was sent out to about 1,500 professionals, TMA said. The respondents represented a total of 205 firms.
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© 2006 AFX News
