Turnaround the wrong pond to fish in
The EU has €6tr of debt of which €1.2tr is distressed. When you look at a list of what may be in the 1.2tr pot, it does not make exciting reading for a turnaround investor. You would hope that there may be some shining stars. But for example when you run a list of UK CVAs Southern Cross sits pretty at the top with the diminishing list of rather nebulous businesses that decrease in value. The sheer scale of the full list is simply staggering.
This debt pot not only effects businesses in the debt, but the demand markets overall.
Intellectualizing the fish pond
No wonder Hayek suggested that the market should clear them out. There is no resource pool with the scale to sort them out. On the face of it with about 1/500 exceptions are they salvageable. What will undoubtedly happen is that these pots of debt will be traded, but the longer they are left the less value they will contain. Governments are following a selective Keynesian approach, although they conveniently forget that they money has to be paid back as Keynes suggested, to centralize control of banks etc. This is ridiculous on 2 fronts;
- The smartest people I have met – turnaround investors are fishing in this “value free pot”
- UK VCs are largely investing in UK centric businesses, when the enduring revenue opportunities are elsewhere globally
- Banks efforts miss the need to fix the businesses in the 1.2tr pot – they don’t see that!
- The delay in recognizing the issue is destroying the competitiveness capital intensive businesses that require investment
- But more importantly, the productivity gap between the emerging and mature markets is widening by creating literally a “false economy”
The industry goes on ranting about the fish
The next TMA conference is still when is the “Tidal wave of turnaround” going to arrive the fact is it won’t, and what’s in the pot is like a fish caught in a puddle on a hot day – it has little chance of survival. What’s odd is that the best minds are there with the hundreds of turnaround practitioners hoping for some tasty scraps.
Molton’s investment logic = focus on management stupidity
In turnaround I have eventually bought Jon Molton’s criteria for success invest in a business run by idiots, the logic being that by replacing the idiots with good management the business will succeed. The difficulty comes when you are introduced to one of these businesses by a bank; they often won’t let you change management. So if the management are incapable of delivering the recovery plan even with support, if you value your reputation you may as well walk away and let Hayek or Darwin theory take its course.
How easy is the value to realize anyway?
What’s for sure is that the level of horse power to identify and see through the plan to succeed is often radical. A Spanish bank commentator caught in the storm “Cash and operational strengthening used to work it’s not working now, the level of difficulty is 10x as foundations are not sound. Although there is a shift to simplify the process, Spanish insolvency laws have been subordinate to labour laws making outcomes unclear”
Turnaround the word
Turnaround like don’t is a double negative = meaningless. Who would admit to one or want one anyway? But if you can successfully create and implement excellent robust business models and reach a point of certainty within days – that is hugely valuable capability to leverage to a corporate scenario which is less distressed. Speed gained working in the most challenging circumstances, like the skills developed in A&E are major differentiators.
Photo: Johan Opperman/Solent News