Q1 2023 - (released May 2023)
SA's quarterly Private Equity & Venture Capital magazine
Risk it for the biscuit: opportunities for private equity in business rescue
by Jessica Osmond and Tobie Jordaan
Private equity firms have long been known for their ability to strategically identify and act on opportunities where others may not see them, and business rescue is no exception.
Business rescue presents a unique opportunity for private equity firms and investors to invest in companies that are struggling financially, but that, with the right resources and support, have reasonable prospects of a profitable turn around or rehabilitation.
With the increase in interest rates, rising inflation and relentless loadshedding, the economic strain experienced by businesses and consumers around the country continues to grow. It is only a matter of time until we see a surge in business rescues, where companies are left with little to no option but to restructure their debts through mechanisms provided for in the Act. This presents enormous opportunity for private equity players in the market who understand how business rescue may be used as an attractive vehicle to pursue their investment objectives. Private equity firms play a pivotal role in the distressed and restructuring sector as they are able to act quickly and decisively, which is vital in ensuring a successful and efficient rescue.
Chapter 6 of the Companies Act provides a rehabilitation mechanism for financially distressed companies through the process of business rescue, but one of the prerequisites for placing a company in business rescue is being able to prove that there is reason to believe that the company can be successfully rehabilitated, and this can look different from one distressed company to another.
Since Chapter 6's inclusion in the Act, business rescue has continued to evolve, and the interplay between various sectors, particularly in the private equity, capital investments and distressed mergers and acquisitions space, has become evident.
While business rescue can be a complex and challenging process, for those with the right expertise and experience, it can be used as an opportunity to create significant value in the long run.
Unlike other potential investors, private equity firms typically have the resources and operational expertise and experience to undertake the necessary due diligence and make swift investment decisions, affording them the ability to take advantage of the opportunities presented in a distressed scenario.
This can be particularly valuable in a business rescue situation, where time is often of the essence and the company may need significant operational improvements to return to profitability. Similarly, the business rescue practitioners are often under immense pressure to ensure that processes are followed in accordance with the time frames stipulated in the Act and the approved business rescue plan.
It’s no secret that when a company is struggling financially, its assets are often undervalued or overlooked by investors. However, in such circumstances, private equity firms are able to leverage their experience to acquire these assets at a discount, seeing the potential to generate significant value in the long term. Being able to take advantage of these opportunities may also afford these firms an invaluable window to secure a position in industries in which there are significant barriers to entry, where acquiring distressed assets may be one of the few ways to gain a foothold in the market.
Apart from their unrivalled expertise and resources, private equity firms are also able to bring significant financial resources to the table in a business rescue or distressed situation. This is particularly important given that the company in rescue is, more often than not, struggling with significant debt and disgruntled creditors and stakeholders. This capital injection can provide the necessary funds to compromise its debts, or restructure the debt in such a way as to allow the company to return to solvency.
Whilst, in these circumstances, private equity can offer high returns in the long run, this type of investment is not without risk. Like with most investment strategies, there is often uncertainty as to whether the investment will pay off, and sometimes even more so when investing in distressed companies. To best mitigate this risk, private equity investors should appreciate the importance of winning over the cooperation and approval of stakeholders – being both creditors and shareholders. This may involve working alongside the business rescue practitioner in conducting extensive due diligence, analysing the company’s financials and operations in detail, and developing a comprehensive plan for turning the business around.
Much like in instances of distressed mergers and acquisitions, we are seeing an uptick in the interplay between private equity takeovers or buy-ins as a means of rehabilitation in the business rescue space. This is promising for the future of business rescue and other restructuring endeavours, as it serves as a win-win for investors and companies looking to return to a healthy position of solvency.
Osmond is an Associate, Dispute Resolution and Jordaan a Director in Cliffe Dekker Hofmeyr’s Dispute Resolution practice and Head of its Business Rescue, Restructuring & Insolvency sector.