Smart-Stock.net

An article last week on boston.com about distressed asset investment echoes the sentiments described in last week’s blog; namely, that some of the country’s most significant investors are clamoring to buy up the same distressed assets as Uncle Sam.

Bank of New York Mellon and Boston’s Bain Capital, and investment firms like New York’s Blackstone Group, are among those hoping to make such buys.  Ronald P.O’Hanley, BNY Mellon’s CEO, wants his group’s trillion-dollar investment group to have the same access to distressed assets as the government:

“We’re suggesting that it’s a way to implement the bailout, to have an auction. We’re suggesting that it go beyond the Treasury, and that the Treasury right from the beginning invite others in to invest with them. There are lots of distressed funds waiting to buy. An auction process will provide a mechanism to bring those players in.”

Think about it.  These immensely wealthy companies wouldn’t be so gung-ho to invest in distressed assets if there weren’t serious opportunities for profit.  Furthermore, unlike the nation’s banks, private equity firms like these are in relatively solid financial shape, allowing them to buy up such assets.  Better private equity firms paying for them than us, the taxpayers.

In the race to grab inexpensive distressed assets, wealthy private equity firms lead the comparatively cautious hedge funds. It pretty much comes down having lots of cash and cajones.

Still rich from the credit bonanza of years past, private equity firms are able to keep their distressed asset accounts during the current economic slump and sell them for big profits when the market has regained its footing.  Hedge funds are answerable to investors each month, and thus must be more conservative.

According to Chris Goekjian, chief investment officer at Altedge Capital, “Private equity players have locked-in money.  Distressed hedge funds can have quarterly or annual redemptions rights, so they definitely can get money pulled.  If they take on larger deals and get redemptions, it hurts.”

In an about turn, private equity firms are now financing the very banks that used to finance them.  Major banks like Citigroup and Merrill Lynch are unloading distressed assets for pennies on the dollar to private equity firms.  Within the last year, such firms have purchased $25-30 billion of distressed assets from these banks.

Mark Fennessy, restructuring partner with the London-based Orrick law firm, thinks these private equity firms have a clear edge: “They have the analytical and restructuring talent combined to ensure they can get deals.  Certain hedge funds lack real experience of having these deals.”

It’s inevitable that the economic marketplace will right itself again, and when it does, all these distressed assets could prove to be immensely profitable for these private equity firms.