Change in dynamics relating to turnaround exits

I have noticed in the past couple of years that lenders with troubled assets in their portfolio have a much easier time (generally) now exiting from those credits. The exit is not through participating in a workout with the borrower but much more frequently through selling their position to a hedge fund (sometimes posing as a lender). This trend is great for banks as they can take advantage of liquidity to reduce loan losses, reduce expenses related to maintaining their own workout staffs and reduce the time it takes to convert an asset to cash.

But this trend makes it more difficult for borrowers who have a loan sold since the new buyer (lender) does not have the instituitional knowledge or lending knowledge needed to help in the situation. It also makes business development much more difficult for turnaround consultants for a number of reasons including the fact that their prospective referral sources for troubled loans are often in a different location than the borrower and the consultant. The hedge fund lender is also less aware of what value a consultant can add and so is less likely to refer consultants to his/her borrowers.

David Cho of the Washington Post on 1/31/07 reported that private equity funds spent $540 billion in 2006, compared to $59 billiion in 2003. Hedge funds may be included in that number. The point is that there was 10X increase in capital spent and available in just 3 years.