A Homegrown Flock of Vultures

A new group of Europe-based investment funds is stalking the Continent's bankrupt companies

With European companies heading to bankruptcy courts in record numbers, it's no surprise that vultures are circling. U.S.-based private equity outfits that specialize in picking up distressed assets on the cheap, such as Kohlberg Kravis Roberts, Texas Pacific Group, and Oaktree Capital Management have stepped up their operations in Europe.

But more and more, the vultures eyeing Old World companies come from closer to home. A new flock of Europe-based investment funds is stalking bankrupt companies with the aim of turning them around. "In these old countries there has been a feeling that a company in bankruptcy is dead. But we see real value that shouldn't be thrown into the trash," says Jacques-Henri Piot, a manager of Paris-based Green Recovery Fund. Started last July, the fund has raised $1.8 million from European investors and acquired several ailing French businesses, ranging from aircraft maker Reims Aviation to printing-press manufacturer Seailles et Tison.

Until recently, most of Europe's vulture funds were in Britain. One of the most aggressive, London-based Alchemy Partners, has acquired British businesses ranging from a nursing home company to a chain of home-furnishing stores. But action is picking up in France and Germany, which together account for half of all European business bankruptcies. Take Berlin-based Capital Management Partners, established in late 2000. After raising $120 million, it acquired Schock Group, a maker of kitchen sinks and countertops, in 2001. Last summer it took a stake in Flemming, a chain of dental laboratories. Norbert Dreyer, an investment manager at the fund, says Germany is awash with more opportunities. "It's good for us, because this is a niche where not too many firms like to be," he says. For most investors, he adds, "the risk profile is just too high."

True, but prices are astonishingly low. The Green Recovery Fund, for instance, spent only $30,000 to acquire Reims Aviation. The company, in France's Champagne region, used to assemble planes for Cessna Aircraft Co. But now its sole output is the small F406 turboprop, which brings in about $2 million a year from sales to commuter airlines and French customs and maritime authorities. Piot and his partners figure they can turn a profit by slashing the workforce and investing a few hundred thousand dollars to improve efficiency.

There are pitfalls, of course. Just ask U.S. buyout firm Clayton, Dubilier & Rice Inc., which lost its shirt on another troubled European aircraft maker, Germany's Fairchild Dornier Corp. The U.S. firm headed a group of investors that paid $1.2 billion to acquire the planemaker in 2000, only to have it fall into bankruptcy last year. But even if the vultures steer clear of Fairchild Dornier this time, there are plenty of other targets. Although 37,700 German businesses went bankrupt last year, the German Venture Capital Assn. estimates that venture funds invested no more than $46 million in distressed German companies. Europe's vultures look set to keep flying.

By Carol Matlack in Paris

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