The NYTimes reports that Ernst & Young expects companies and private equity firms with cash to take advantage of the opportunity to buy devalued, distressed assets and companies in 2009 (they certainly aren't going out on a limb in making this prediction). The main issue they rightfully point out is that not that many companies have a lot of cash - although private equity firms have raised 36% more in 2008 than they did in a frenzied 2007. To me, that figure shows that opportunity funds put together by private equity firms (sometimes known as "vulture funds") are ramping up their fundraising to take advantage of the opportunity to buy underperforming companies and assets - presumably including commercial real estate. However, there are many reports of investors attempting to withdraw large amounts from private equity funds or selling their limited partnership interests in these funds for fractions of their previous worth. So while fundraising may be up, redemptions may more than offset these increases.
The question is when do the opportunity funds that do maintain their cash pull the trigger and start buying? Conditions are pretty bad for a fair number of companies out there who are seeing restricted access to debt financing. But they could get worse as consumer spending continues to drop off a cliff - forcing more and more companies into bankruptcy. I would expect much of the opportunity fund buying will be purchases of assets out of bankruptcy. In the commercial real estate sector - all indications are that the commercial real estate downturn will continue for at least two more years as vacancy rates continue to rise. So opportunity funds focused on office, retail and industrial space may wait a bit longer to snap up underperforming properties. Of course any buying of distressed assets in any sector will have to be done creatively if debt markets don't significantly improve.
Comments