Vultures see better pickings, but many are circling slowly

From Times staff writer Walter Hamilton:

Few corners of the investment world are drawing more interest these days than "distressed" assets -- the realm of so-called vulture investors.

The sub-prime mortgage crisis, credit crunch and weak economy have left plenty of companies in dire financial straits, with many more expected to join those ranks. Vulture investors pick through troubled firms in search of bargains.

At an investment conference in New York on Wednesday, managers of private-equity funds specializing in distressed investing said they're seeing loads of interest from big-money investors looking to pour cash into their funds. The conference, sponsored by The Deal, a Wall Street trade publication, attracted about 200 industry players and investors.

Raquel Palmer, a partner at KPS Capital Partners in New York, said her firm recently capped a new distressed fund after attracting $1.2 billion from investors. The fund easily could have raised four times that amount, she said.

The best opportunities, Palmer said, are in companies that papered over their problems in recent years by borrowing money during the era of free-flowing credit that ended in the middle of last year.

"We're seeing a lot of opportunities that were really born from the fact that many transactions that occurred over the past few years were highly levered companies," she said. "There was access to capital -- what we call bailout financing -- for businesses that had real operational problems. But instead of fixing the underlying business they just went out and raised more cash. We think that [will be] the single biggest improvement in our deal flow over the next few years."

Vultures often expect to buy debt or equity stakes in companies from investors who made bad bets and now just want out, even at pennies on the dollar.

But Palmer and others cautioned that a company that looks like a bargain today could be an albatross tomorrow if the economy slides further. They're picking investments carefully and proceeding slowly, she said.

"We really are being very cautious right now," she said.

Which might be good advice for individual investors who are themselves scavenging for bargains among beaten-down companies.

Photo: Associated Press