According to Leon Black, you don’t need a “global recession to have good distressed opportunities.” Instead, you need a careful evaluation of opportunities in the right industries and regions.
This idea is particularly true today, as distressed investors face low deal supply and favorable lending environments. But properly evaluating opportunities is difficult. “Informal surveys of industry insiders find that less than 25% of distressed companies are viable and can be turned around successfully,” explained Axial Member Melissa Craig.
While many investors try to overcome this uncertainty with prediction models and Z-scores, “There are inherent flaws in all prediction models,” explained Craig. “Being able to identify which of the 75% that aren’t going to make it is part of the art of distressed investing,” she continued.
To explore the art of distressed investing, below are key segments from our recent webinar on how to identify a viable opportunity, which sectors to focus on, and overall 2014 outlook for distressed investing.
Questions to Ask When Considering a Distressed Opportunity
In the webinar, Suzanne Yoon of Versa Capital Management, Ron Castor of JC Jones & Associates, and Gary Prager of GB Credit Partners discuss the critical questions you should ask when considering a distressed investment — starting with: “Should this business even exist?”
Sectors to Watch
In the below clip, the webinar participants discuss the 8 industries that will likely see distressed activity in 2014. Two industries stood out in particular: healthcare and mining.
Outlook for 2014
Despite the challenging environment in 2013, there is hope on the horizon for distressed investors. An increase in interest rates will likely revitalize the distressed deal flow, creating a “wave of defaults for marginal borrowers,” said Gary Prager. Whether that will occur in 2014 is less certain.
To make the most of this slower period, “Distressed investors seem optimistic that they can build on the fundraising momentum they enjoyed in 2013, even as low default rates and an abundance of cheap credit has made investing more difficult,” wrote Lillian Rizzo earlier this year.