Turnaround boutiques in vogue as investment banks prep for more distressed deals

Data InsightDealspeak 7 November

Turnaround boutiques in vogue as investment banks prep for more distressed deals

Financial services companies are gearing up for increased distressed M&A activity by acquiring specialists in workouts and restructurings.

“Folks see an uptick in distress and restructuring and want to make sure that’s a service they're prepared to offer,” said Michael Jacoby, senior managing director of Phoenix Management Services.

Advisory M&A activity has tended to rise during moments of great market turbulence or economic uncertainty, according to Mergermarket data. That was true after the Internet bubble burst (2000-3), during the Global Financial Crisis (2008-9), and after the onset of the Covid-19 pandemic. Following just seven advisory transactions in 2020, activity surged with 18 deals in 2021 and 19 in 2022. The 15 deals in the year to date (7 November) put 2023 on track for another strong showing.

Turnaround dealmaking

Advisory firms with expertise in distressed situations have been snatched up by strategics as well as financial sponsors in recent years. Most recently, Kelso & Co.-owned JS Held acquired Phoenix Management Services for undisclosed terms last month.

FE International is another investment bank that could look at establishing or acquiring a debt-focused fund as it moves to transform itself into a middle-market investment bank, said Randal Stephenson, head of investment banking. "The lower middle market is woefully underserved. Now, with interest rates higher, it's harder to finance larger complex transactions. We are seeing a rush to PE and credit funds in the lower middle-market," Stephenson said.

Other recent deals in the turnaround segment include Hilco’s July 2021 acquisition of Getzler Henrich; Accordion’s acquisition of Mackinac in May 2021, and Conway MacKenzie's acquisition by Riveron in 2019. All firms were similar in size to Phoenix, with between 20 and 40 employees, according to Jacoby.

Meanwhile, firms that are already large players in distress – such as FTI Consulting [NYSE:FCN] and Alvarez & Marsal – are acquiring expertise in the technology, media and telecommunications (TMT) sector, a possible indication of the next hotbed of distressed activity.

A year ago, Alvarez & Marsal made a significant investment in its Software, Technology & Services (STS) offering, adding more than 30 hires. Just last month, FTI Consulting announced the launch of FTI Delta, a strategy consulting practice focused on TMT and the public sector.

Trouble brewing

There is little wonder that advisory firms are looking at new sources of income, given North America’s investment banks have suffered a painful drop in revenue from a prolonged slump in dealmaking. During the first nine months of 2023, fees for M&A advisory work in North America tumbled 25% year-on-year to USD 11.5bn, according to Mergermarket data.

What is more, US companies will have to refinance USD 3.9trn worth of loans and high-yield bonds in the next five years, according to Debtwire. With the Federal Reserve pursuing a ‘higher for longer’ policy on interest rates – now at their highest level in 22 years – companies face having to refinance at much higher rates than they have been used to. That will impact earnings and will likely result in a spate of restructurings, distress and bankruptcies.

Levels of distressed dealmaking surged in 2020 following the turmoil of the pandemic’s onset, but then fell sharply in 2021 and 2022 amid soaring stock market valuations and low interest rates, Mergermarket data show. This year, distressed deals are on the rise again. The number of transactions involving North American targets that are either distressed, being liquidated or in administration in the year to date has almost doubled 2022’s total. The stage is set for more turmoil in 2024. Investment banking advisors such as Phoenix hope to be ready.

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