The New Power Differentiator

I make no bones about the fact that I am an unabashed believer in the power of market leadership for professional service firms (as well as for all kinds of other companies). Good things happen to market leaders, and dog crap happens to those who are not.

Market leaders attract the best clients, the best professionals, and are able to charge the best rates. And, most people prefer to associate with winners, rather than with also rans. Because of the many benefits of market leadership, attaining and maintaining market leadership is worth the considerable effort needed to make it happen.

Since clients hire me to help them build sustainable market leaders, I am continuously looking for the latest trends that can impact market leadership in a given market segment. As you can read in the postings on this blog, I am seeing a ton of changes occurring in the Restructuring world that will impact what makes a given professional service firm a market leader.

I see an emerging trend that client and matter selectivity will be a power differentiator. The kind of differentiator that can contribute to market leadership. Now, client and matter selectivity has always been important. But, I am increasingly convinced that such selectivity will be a top five contributor to attaining and maintaining market leadership for lawyers, turnaround firms, investment bankers, etc.

With so many cases being played out on the “liquidate and litigate” format, opportunities abound for all kinds of professionals to have a case turn into a financial DISASTER.

Note that is "DISASTER" with capital letters!

Equally importantly, financial disaster will often be accompanies by reputational damage.

Those who will be market leaders for the (long) duration of this downturn will be firms who (1) are able to instill in their partners the importance of this issue, and (2) put in place the processes to safeguard against a front line partner being negligent in their assessment of the financial prospects of the case.

Interestingly...assessing payment probabilities becomes as important as one's substantive expertise.

Some will say that this is nothing new. I would suggest that assessing probabilities has gotten a whole lot tougher at a time when many of us are having difficulty seeing clearly because of the mind numbing pace of change. And, never has there been more pressure on front line partners to bring in business.

Opportunities abound for failed judgments with million dollar+ consequences.

In the words of that famous Disney tune from Aladdin, it is a "Whole New World."

Distressed Investment Capital Head Fakes

All of us want to believe that there is an ample supply of capital available to invest in distressed assets, particularly for those situations which offer excellent potential returns for savvy distressed investors. And, there have certainly been deal professionals and articles suggesting that such capital is available, even if not as plentiful as in years gone by. But,

Is capital really available for distressed situations at this time?

Based on my work behind the scenes with leading professional service firms involved in the Restructuring world, I believe that such capital is much less available than the noise would have us believe.

Sure, there are funds that have raised large amounts for investment in distressed. But, my sense is that most of these investors are keeping their powder dry while they wait for what they perceive as something closer to the bottom of the downturn. A good example of such investors are the two that were the subject of my post Sage Advice from Two Investment Pro's.

Some of these investors also have investments in previous funds that will be where they will want to deploy some of the new money (subject to fund limitations on these types of transactions).

Let me make clear that there are certainly occasional distressed deals being done by courageous investors. But, the number being made has been considerably less than the buzz as to available funding for distressed.

So where has all of the buzz come from? You know, as well as I do, that the buzz has come from representatives from all manner of financial entities who have been out in the market saying their entity was definitely interested in doing deals. The skeptic in me has believed that increasingly, over the last six months, such claims have been more efforts to keep one's pipeline of potential deals full rather than true interest in consummating a current transaction.

I am not suggesting these reps were lying. I do think that, at minimum, there was a big gap between what they may have personally believed and institutional reality.

Well, the tide is turning. Over the last couple of months, more and more of these reps have been terminated - a clear sign that their employer is not looking for deal flow now, or even in the near term future. As bad as I personally feel about some of the quality professionals being laid off, I do feel good that the head fakes as to capital availability will be reduced.

Turning around a troubled company is difficult enough, especially in these challenging times. There is no time to be chasing solutions that are not real.

As sure as morning follows night, the appetite for quality distressed investments will increase. But, such increase will not likely occur quick enough to be a silver bullet for most current distressed situations.

That is not all bad for Restructuring professionals. The true pro's will have to use all their creativity to find solutions absent a silver bullet. Woe be to the novices, especially those who don't read head fakes well.

Takeaways from TMA's Distressed Investing Conference in Vegas

This two day conference was rich with takeaways for me. Some of the takeaways were confirmation of some hypothesis with which I have been working. Some generated new thoughts.

Here are my prime takeaways (some of which will be the subject of deeper commentary in the coming weeks):

1) We are in for a protracted downturn, one measured in years not months,

2) There is presently a dearth of capital for distressed situations, notwithstanding some sources talking up their interest,

3) Because of #2, for the foreseeable future “hostage financing” will be the best source of capital, notwithstanding the desire of these capital sources to exit,

4) Because of the complex capital structures that have evolved because of syndicating and parsing the risk levels, tranche warfare will be the name of the game in many situations,

5) Valuations will play an important role in the tranche warfare, at a time when valuations are more difficult than any time in my memory,

6) Companies without compelling business models and/or market leadership positions will often be quickly liquidated (as in gone forever, not just sold in a 363 sale),

7) There is much more focus on expense reduction rather taking revenue from competitors (some smart consulting firm is going to start going after this opportunity),

8) Constituencies are not going to stand by and watch professionals run up big fees where constituencies are getting creamed, and

9) Many in the profession are looking for a redo of past patterns, some others are recognizing that the changed circumstances call for new methods and processes of restructuring.

My overarching observation is that all the change represents great opportunities for firms…whether law firms, turnaround firms, or investment banking firms…that are willing to truly embrace the changes that are occurring. I am expecting that we will see some new market leaders emerge over the next couple of years.

Sage Advice from Some Distressed Investment Pro's

Day #2 of the TMA Distressed Investment Conference was as worthwhile as the first day. Lots of good data points, topped off by some sage advice from some distressed investment pro's. I will get to that advice after a brief overview of some of the other high points.

Today, there were two excellent presentations, one on "Where Will the Opportunities Be", the other on "Trends in DIP Financing." As to the former, my own take has been that opportunities will be available in every single industry, and in every size company. Investors should focus on what they know best so they are able to make the most of the opportunities that will abound. The panel’s comments deepened my hypothesis that the opportunities will be everywhere.

As to “Trends in DIP Financing," notwithstanding glimmers of hope from the panelists, for all intents, I see the DIP market as being largely non-existent, at this time. I have trouble envisioning any financial institution committing sizable dollars to this market given the pressure on the institutions to deleverage and to reduce their risk exposure. The best source of DIP financing will likely be existing creditors. But, capital markets can change quickly and this is a niche market every turnaround professional will want to watch very closely.

The highlight of Day #2, for me, was a terrific panel of seasoned pro's in distressed investing. Their insights on what experienced capital was doing at this time made the entire Conference worthwhile to me. My perception has been that those who had recently raised capital to invest in distressed were largely sitting on the sidelines. Two of the panelists, Michael Heisley of The Heico Companies and David Shapiro of KPS Capital Partners, were especially illuminating as to at least the attitude of some of the experienced distressed money. They both articulated a host of reasons why there organizations are currently taking a very cautious approach to new equity investments in that they see the downturn as (1) long lasting (as in 4-5 years), and (2) not yet at close to the bottom.

All manner of financial entities need to keep their visibility up and thier pipeline of potential deals flowing. The challenge in the current environment is to ferret out those entities who are really doing deals at this time, as opposed to those who are just trying to keep visibility for a future time. Woe be to the Restructuring team that wastes much of their precious time dealing with an organization that is more interested in maintaining their image of doing deals rather than really doing deals at this time.

Up next: Takeaways from the Conference.

TMA Distressed Investing Conference in Las Vegas

I am writing this from the TMA Distressed Investing Conference being held today and tomorrow at the Bellagio Hotel in Las Vegas. There are about 400 registrants representing a cross section of law firms, turnaround firms, and investment banks that make up the heart of the professionals serving the Restructuring market. There are a handful of distressed investment funds represented, but the paucity of such firms present suggest that many potential distressed investors are focusing on their own issues these days.

Conference Co-Chairs Jeffrey Fitts (of Alvarez and Marsal) and Andrew Miller (of Houlihan Lokey) did a great job of assembling some excellent panel topics and first rate speakers.

The event provided an excellent opportunity for me to get some updates on current trends from the program, as well as connect with friends in the industry who were kind to let me grill them on their perception as to where the industry is going.

The program launched really strongly with the morning being devoted to a thorough exploration of the twin Chapter 11 cases of American Color Graphics and Vertis: The First Dual Prepack Merger. Professors Laura Resnikoff and Edward Morrison, both of Columbia University did a superb job of setting up the dynamics that resulted in this first. The professionals involved in the case then provided their insights into how the dual prepack evolved.

My hypothesis, for this blog as well as for my consulting to firms looking to be among the winners in the Restructuring world, is that the Restructuring process is going to need to change as a result of changed circumstances in the environment. This case is a good example of the kind of innovations I expect to see more frequently, if the profession is going to be a contributor to effectively resolving the morass before this country.

My subsequent one-on-one discussions with Professor's Resnikoff and Morrison demonstrated they see changes occurring. Neither they...nor I...have a crystal ball, but they are seeing changes in processes by innovators (ala the dual prepack). As just one example, Professor Morrison has been studying the ratio of liquidations to restructurings over the years...a subject I will cover in subsequent posts.

The Thursday afternoon session started with the Keynote presentation by Harvey Pitt, former SEC Chairman and current CEO of Kalorama Partners. Harvey has the wisdom and experience to be very thoughtful about the changes that I (and more importantly he) believe are much needed to foster greater transparency in the capital markets. I always enjoy hearing Harvey speak, and this time time was no different.

Harvey Pitt's presentation was followed by excellent panel discussions on a more traditional Chapter 11 case (Radnor Case), on the toxic paper of Credit Swaps (my classification, not that of the speakers), and on challenges with exit financing.

Stepping back from the details of the day, I heard lots of change. Yet, I also talked to many professionals who seem more joyous that the pendulum had swung back to them than interested in learning how what has swung back is a very, very different pendulum.

Recently on my other blog, Prospering in Tough Times, I wrote about dinosaurs in other industries and in the general population. I guess I shouldn't be surprised that the Restructuring industry I so respect has its share of dinosaurs. Here is hoping that the voice of the innovators get heard so that the profession is at its best serving the enormous amount of troubled companies.

Up next: Day 2 of the Conference.

Is Everyone Really a Turnaround Expert?

The market is booming with turnaround "experts." And, I am seeing more and more claims of such expertise every day.

As I wrote in my last post on The Lost Art of Turnarounds, I believe turnarounds are tough stuff. A bonafide turnaround expert requires an awesome array of skills, experiences, and insights. The array is so awesome that one would think that far, far less than 1% of all CEOs, COOs and experienced consultants could actually have what it takes to lead a successful turnaround. Yet,

claims of being a turnaround expert abound.

The vast majority of senior executives who get sacked or laid off and are over 50 years old are going to have a difficult time getting rehired in corporate America at anything close to a similar level of responsibility. Wicked age discrimination is the unspoken part of the downsizing that is occurring in every industry, across the country. In other downturns, some of these executives would have used some of their retirement funds to buy a business or launch a franchised operation. For most of these laid off executives, retirement funds have been decimated by the market meltdown and thus buying or starting an operating business will be an option for far fewer. So, I expect to see more people forming boutique consulting firms and offering themselves up as a turnaround "expert."

Adding to this supply of claimed experts will be the thousands of directors and partners of Restructuring firms whose real experience is in forensic activities, but after twenty years of doing that work now see an opportunity to realize their dream of being a turnaround "expert."

Regretfully, notwithstanding valiant efforts by the Turnaround Management Association, certification of turnaround professionals has never been soundly endorsed by the major Restructuring firms....at least that is what shown in many firms by comparison of the number of Certified Turnaround Professionals in a given firm to the number of professionals claiming turnaround expertise from the firm.

Without a widely accepted standard for certification, or the rigorous ranking of attorneys as provided by Chambers, the hordes of turnaround experts are descending on all the constituencies and offering their expertise. Constituents, left to their own devices, are already starting to use the newbie pricing as a lever against the bigger firms.

What a mess! And just when this country needs great turnaround experts more than ever.

Just another indicator of why I believe that big changes are coming to the Restructuring profession.

This is the third and final post in a series on tunarounds that started here. Up next, a report on the TMA Distressed Investment Conference from Las Vegas.

The Lost Art of Turnarounds

The number of companies that are going quickly from distressed to liquidation raises the question of whether "turnarounds" have become a lost art.

There certainly is no shortage of professionals claiming to be turnaround specialists. The large restructuring firms have been adding people, as have some of the smaller firms. And, many out of work executives are now coming to market as turnaround specialists.

Notwithstanding all of this claimed expertise, liquidations are becoming more numerous.

What gives? What has changed?

In my many years of experience in the Restructuring world, first on the front lines and over the last dozen years as an advisor to professional service firms (often about their Restructuring practices), I long ago came to the conclusion that:

turnarounds are very, very tough stuff.

There are good reasons that companies become sick and curing the ills of a troubled company takes superb talent, capital and time. Talent alone has never been the entire answer.

Truth of the matter is that most of the turnarounds that have occurred in the last twenty years has been through the purchase of the sick company by private equity which injected talent and capital, which in turn created the time for a turnaround.

So what has changed that explains the rash of liquidations?

First and foremost, those private equity funds that have money for distressed investments seem to be largely sitting on the sidelines, awaiting something closer to the bottom of the cycle.

Second, capital availability to support turnarounds is much scarcer than many restructuring professionals seem to appreciate.

Third, this economy is so difficult that only the very best of turnaround experts are likely to have the skills and experience to sustain a turnaround in this environment. Many turnaround experts are skilled in cost cutting; but in this environment revenue enhancement skills are needed every bit as much.

Fourth, there is so much uncertainty about the overall economy that rallying constituents around a turnaround plan is as difficult as it ever has been.

None of these factors are stopping individuals and firms from promoting their ability to do the near impossible. Of course, when one is demanding to be paid on an hourly basis, it is pretty easy to be bullish about the prospects for a turnaround.

One has to wonder how soon we will see constituents demanding that turnaround experts put their fees (or some significant portion thereof) at risk to assure that more reality is quickly brought to the table as to the true prospects for a turnaround.

Coming next: In tomorrow's post, Is Everyone Really a Turnaround Expert?, I will share one of the reasons why I believe so strongly that the Restructuring profession must change.

Lessons from the Demise of Circuit City

The announcement that efforts to turnaround Circuit City had failed and the company would be liquidating is just the latest in a string of well known retailers who have quickly moved from a Chapter 11 filing to liquidation. Well known national names such as Levitz, Linens N Things, Sharper Image, Wilson Leather, and The Bombay Company are just a sample of the retailers that are now a part of the past of retailing.

What are the lessons from the demise of Circuit City? Since I no longer work on the front lines of the Restructuring world (my consulting is focused on assisting Restructuring practices of leading professional service firms), I can't offer any insights into the nuances of the collapse of Circuit City. But, I am absolutely convinced that their are forces at work that go beyond the unique elements of the Circuit City case.

I have been struck by the many commentators who would suggest that the cause of this rash of liquidations is the changes to the U.S. Bankruptcy Code enacted with the Bankruptcy Reform Act of 2005 (BAPCPA). I was encouraged by the recent article questioning this view by Bob Duffy, Senior Managing Director of FTI Palladium Partners. Bob's article, Broken Beyond Repair, appeared in the December (2008) issue of the Journal of Corporate Renewal, and does an excellent job of laying out the factors that are more accurately the cause for all of the liquidations in the retail sector.

The implications of the liquidations of retailers goes far beyond the retailing industry. I believe that

we will see a much higher percentage of liquidations, in a variety of industries, than we have seen in our life times.

Such an occurrence will have significant impact on the work of professionals in the Restructuring profession.

Are we at the point that the Turnaround Management Association should consider a name change to the Liquidation Management Association?

Coming next: In tomorrow's post, The Lost Art of Turnarounds, I will share my own view as to why liqidations are becoming more prevalent.

Restructuring America Radio Show

The Restructuring America show brings you insightful interviews of leading lawyers, consultants, investment bankers and CEOs operating on the front lines of the Restructuring world. The host of this weekly, one hour show is Dave Carpenter, long a thought leader in the Restructuring arena.

The show is broadcast at Friday, noon EST, on Exceptional Wisdom Radio.

Because this is internet radio, you can:

listen to each show at your convenience on your computer, by an MP3 download, or through ITunes.

Many listeners of Exceptional Wisdom Radio arrange to get their favorite shows automatically delivered through ITunes giving them complete flexibility to listen at their convenience on their commute, or while doing a workout. (If you have never accessed internet radio, think of it as like the convenience you get from your DVR with television broadcasts.)

Listening on a regular basis will give you insight into the backgrounds and personalities of the leaders in this important field, as well as fresh perspectives on some of the latest developments.

Marketing a Restructuring Practice

Success in marketing a Restructuring practice requires a blend of technical competence, the right marketing strategy, and the right marketing tactics. Dave Carpenter is widely recognized for his technical knowledge of the Restructuring process and his marketing insights. He has personally sold millions of dollars of Restructuring assignments, and has also taught many lawyers, consultants and advisors how to become major rainmakers.

Unlike other marketing trainers, Dave has the deep experience of having been on the front lines winning hotly contested major, multi-million dollar assignments. His coaching is not theoretical; he coaches from the experience of having been in many pursuit battles. As he likes to share with those whom he coaches, he has the painful scars of having been a participant in losing "pitches" that taught him what not to do in a pitch.

Dave's greatest coaching capability is teaching others how they can become a major rainmaker by learning how to "catch" rather than "pitch." Because of his confidence in his ability to successfully teach any professional who truly wants to become a rainmaker, his standard compensation arrangement is to link his compensation to the success of his clients.

If you and your colleagues want to take your practice to the top, Dave Carpenter is the person who can show you exactly how to do so.

Building a Restructuring Practice

The number of Restructuring professionals is large, and ever growing. But, the number of Restructuring professionals that have built large successful Restructuring practices can be counted on your hands.

Being a Restructuring practitioner...whether as a lawyer, consultant, executive or investment banker.. is very difficult. Building a large successful Restructuring practice is even more difficult, as evidenced by the paucity of professionals who have done so.

No one in the Restructuring world has a more extensive record of building Restructuring practices than Dave Carpenter. Beyond the large practice he built for Coopers, Dave has been an advisor to some of the leading Restructuring practices, in a number of disciplines and under a variety of mandates. Examples of some of his consulting assignments, involving Restructuring practices, include:

• Diagnosing the problems and creating the turnaround plan for a poorly performing Restructuring practice of a major accounting firm,
• Creating and building a unique Restructuring CFO practice for a national professional service firm,
• Developing the strategy for Restructuring market leadership for a regional law firm,
• Creating a market leadership position in Creditor Committee assignments for a local law firm in a major city, and
• Creating national Restructuring visibility for a regional law firm.

In addition, Dave Carpenter has developed the new business development skills of some of the leaders, across the country, in the Restructuring profession.

Because Dave's assistance represents valuable competitive advantage, Dave consults on an exclusive basis, working with only one client in a market segment.

Dave Carpenter - Restructuring Thought Leader

When it comes to the business of Restructuring, Dave Carpenter has unmatched credentials and exceptionally broad experience.

Dave cut his eye teeth in the world of restructuring when he was named head of workouts (more commonly called "special assets" these days) for a major East Coast bank. He was then recruited by Coopers & Lybrand to create a Restructuring practice in Philadelphia. Over the fifteen years he was at Coopers, he built one of the country's largest Restructuring practices with the help of some of the pioneers of the Restructuring industry. Ultimately, he was chosen to lead a roll-up of similar practices across the country into what became the Financial Advisory Services ("FAS") Group. The FAS Group became one of the five lines of business for Coopers under Dave's leadership.

Dave Carpenter's experience includes both building a mega practice (750 professionals generating over $125 million in annual revenues in the mid 90's) and personally leading some of Cooper's largest Restructuring assignments. Examples of some of the large engagements he personally led include:

• Financial advisor to the Examiner (Neal Batson) in the Southmark Chapter 11 real estate case. This was one of the largest Examiner assignments in the history of bankruptcy.
• "Accountant" for the Creditor's Committee in the second Continental Airlines Chapter 11. This case is viewed as one of the most successful airline Chapter 11's in history.
• Forensic analyst and expert witness for the U.S. Justice Department and the State of Maryland in the EPIC fraud.
• CRO for a large regional department store chain after a crisis arising upon a failed buyout.

Dave has worked major restructuring situations in many different industries, from a variety of positions (for the debtor, for lenders, for unsecured creditors, for trustees, etc.).

In 1995, Dave Carpenter left Coopers to launch Partners for Market Leadership, LLC, an Atlanta based consulting boutique that assists professional service firms in attaining market leadership. Much of his work over the last decade has involved assisting firms in building a restructuring practice and/or guiding them in marketing a restructuring practice. Recently, Dave was selected by Boston based Exceptional Wisdom Radio to be the host of their newest radio show, Restructuring America. He has long been a member of the Turnaround Management Association (TMA) and had the honor of being one of their keynote speakers at their 2000 annual conference.

Dave Carpenter is a prolific writer. He is the author of the popular blog, Prospering in Tough Times, and one of Amazon's leading reviewers of business books. He is the co-author of the ebook, Prospering in Whitewater Times. His complete bio and public recommendations can be seen at the LinkedIn profile of Dave Carpenter. His philanthropic activities and honors can be seen at his Dave Carpenter home page.

The Genesis of This Blog

These are truly extraordinary times in the history of America. All signs point to this economic downturn becoming the worst downturn since the Great depression.

The Restructuring industry, or "profession" if you prefer, has matured significantly over the last thirty years over which it emerged as a profession. The question is:

How will the Restructuring profession change to maximize its utility in the very changed circumstances in which America now finds itself?

Having served on the front lines of the Restructuring profession from the early days (does that make me a full fledged dinosaur?) and having spent the last 10+ years advising major firms as to their Restructuring practices, I have had a ring side seat to the significant changes that have occurred in how restructurings typically play out. But, I suspect the changes I have seen over the last thirty years will pale by comparison to changes that will occur over the next three to five years.

As part of my continual quest to keep my hand on the pulse of the profession, I have been informally asking thought leaders in the Restructuring industry how they see the profession changing in the coming years. What I find fascinating is that those who are strong advocates of needed changes in other industries, by and large conclude that the profession does not need to change. Somehow, that just doesn't sound right! Why would this industry be any different than every other industry facing the need for radical change?

I have decided to up the ante. I am now going beyond informal, private questioning. Every week, on my Restructuring America show (debuting in early February), I will be interviewing thought leaders in the profession. Besides asking them to update all of us on developments at their firms, I will be asking them to share what they see as some of the important changes unfolding on the front lines of the Restructuring world. Through these interviews and my market research on behalf of my clients in the Restructuring arena, I will be offering up thoughts on this blog as to some of the changes that are occurring.

I hope that my writings will stretch your own thinking about this important profession. Most importantly, I hope to engage you to the point that you will share comments with readers, whether on an anonymous basis or with full attribution. I have no crystal ball, and claim no all knowing sense of where the profession is heading, or needs to head. I think I do know some of the questions that need to be asked.

In creating this dialogue, I hope to join you in advancing a profession that is so important to the revitalization of the economic strength of our country.