VIDEO Interview: Covid-19 Shutdown: How should family offices react to newly distressed investments?

In light of the current Covid-19 shutdown and economic ramifications across the globe, many family offices and private investors may now find themselves in uncharted waters.  Peter S. Kaufman, President of Gordian Group sits down with David Beach of Crestmont Investments to discuss how private equity investors should approach the current environment and how they can address (and not avoid) issues of new distress in their portfolio companies.

Below is a timestamped breakdown of the interview and a full transcript.

Gordian Group President Peter S. Kaufman and Crestmont Investments’ David Beach

00:19 | What should family offices being doing and thinking now in light of COVID-19 over the last two months? Consumer demand has plummeted and the credit bubble has burst. Without a vacine it’s difficult to know what’s going to happen in the coming months.

RELATED: Corporate Debt Bubble Has Burst Amid Coronavirus (Fox Business)

01:18 | But, there are new dynamics between lenders and borrowers that can advantage shareholders. The key is having a strategy to make lenders do what the board wants them to do.

03:34 | Aside from hiring Gordian Group, what should Family Offices do if a profitable investment has become distressed? Are there any quick fixes?

Full Transcript

David Beach (00:01)

Hi, this is David Beach with Crestmont investments. And I’m here today with Peter Kaufman of Gordian Group. Talking about what to do now with the current COVID shutdown and its impact on family office investments. Peter, in your view, what in the world has just happened over the last two months?

Peter S. Kaufman (00:20)

It’s been fascinating as an investment banker who only deals with advising boards that have capital structure challenges. The world has caved in, especially if you’re a consumer facing business directly or even indirectly. The government is trying to prop up businesses and workers, but what the government can’t do is create demand. And right now there’s just no demand. My crystal ball is no better than anybody else’s I think until, and unless there’s a vaccine, I think demand is going to continue to be tamped down. The credit bubble has burst as part of this. For 10 years plus or minus a whole lot of money was available to companies that in other cycles would be undeserving of it. And they’ve been able to refinance their capital stack and kick the can down the road. And that game is, is over.

And right now you have a really interesting dynamic between lenders and companies, private owned companies, private equity sponsors, family office backed, public companies. And the tension is as simple as this.

Everyone’s shell shocked. The lenders don’t know what to do. What they’d like to do is to keep the borrowers on a short leash, you know, 60, 90, 120 day forbearance periods with more equity coming in below what we would call Mount Debt because these companies almost uniformly can no longer the amount of debt that they’ve taken on because the bottom has dropped out of revenues, and of course, profitability.

On the other hand, the companies whose crystal ball is no better than anybody elses wants a couple of years of free runway, where they don’t have to look over their shoulder about what happened last month, what’s gonna happen this month.

And they’d like, arguably two or three years of covenant, almost covenant free relief from the usual reporting requirements and the usual trip wires that lenders have to keep an eye on their borrowers.

That’s where the tension is. What we do for companies in this situation, because we’re the only firm in the restructuring space. The only investment bank that doesn’t represent financial creditors, banks, bond holders, et cetera, is we figure out strategies to make the lenders do what the board wants them to do.

These strategies are often not, but often bankruptcy centric, meaning, every one of these situations views the world through the prism of what can they do to me in a bankruptcy, what can I do to them in a bankruptcy? And when we go to the lenders would bespoke solutions, depending on what the particulars of any given situation are. We show them strategies that we’re prepared to carry out in chapter 11, that they’ll like a lot less then giving us two years runway. And that almost always ends up with an out of court solution that is amenable to the board of directors, trying to look out for shareholders.

David Beach (03:34)

If I’m a family office who has all of a sudden seen a profitable investment or a successful company now face bankruptcy, or, other insolvency or some other sort of distress, are there any quick fixes? What would you advise or what’s your thoughts to that family office?

Peter Kaufman (03:55)

Other than call me, there are no quick fixes. But, the shareholders and the board need to always remember that shareholders have two things going for them at any given time. Number one is option value, which is time and volatility and number two control into until they don’t. So even when things look dark, there are always, almost always strategic options available to companies and shareholders who have the will to deal with their creditors in a way that will turn out advantageously for the company and the shareholders.

David Beach (04:35)

Thank you very much. Any parting thoughts to equity holders right now besides call Gordian?

Peter Kaufman (04:44)

keep the faith, get great advice that’s unconflicted with your creditors, hope for a vaccine soon, but hope isn’t a plan you’ve got to make do with the cards on the table. And we usually find that a well-advised board looking out for shareholders is usually more nimble in times of uncertainty than are more vanilla lenders.

David Beach (05:05)

Great. Well, thank you so much, Peter. I’m sure we’ll be seeing a lot of activity in the weeks ahead.

Peter Kaufman (05:11)

Thank you, David.