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Private equity seeks creative distressed deals

NEW YORK (Reuters) - Private equity firms are viewing the so-called “loan-to-own” strategy as problematic and are seeking more creative ways to buy distressed assets, a partner of boutique advisory firm Perella Weinberg Partners said on Wednesday.

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“Almost every private equity firm that we’ve talked to has (asked) how do we acquire debt to take control of a company?” said Michael Kramer, speaking at the Reuters Restructuring Summit in New York. “Very few have actually gone through with it.”

Kramer said while loan-to-own strategies have typically been successful for hedge funds, private equity firms usually want a longer time period to do due diligence on a target.

A loan-to-own strategy usually involves investors, typically hedge funds, buying a company’s debt before it files for bankruptcy, in order to gain control of the restructured company.

“(For) any loan-to-own strategy, you have to be willing to get over a couple of things first,” Kramer said. “You have to be willing to not have perfect information in the diligence process and be willing to commit capital without knowing there’s certainty of ownership or control at the back end,” he said.

A lot of private equity firms decide after analyzing that situation that it isn’t the right strategy for them, he said.

Firms are instead seeking out opportunities through their networks of relationships from their portfolio companies, and looking at ways to make acquisitions through those portfolio companies, he said.

Private equity firms buy companies in order to sell them for profit a few years later. The larger buyout firms own scores of portfolio companies in different industries at any one time.

Buyout firms have been pursuing other types and structures of deals in the absence of the plentiful supply of cheap financing seen during the 2005-7 buyout boom.

Kramer said: “A lot of private equity companies are saying ‘OK, if there’s a distressed company in an interesting industry, I know someone else in that industry that’s healthy. Can I team up with that healthy company, put capital into that healthy company and then they acquire the distressed assets?’”

A lot of companies are focused on top-line, or revenue, growth right now, he said, which is really achieved through making acquisitions at this point.

Additional reporting by Caroline Humer, editing by Gerald E. McCormick