Playing Out of Position

One of the most famous stories about Hall of Fame basketball star Magic Johnson is his 42-point, 15-assist and 7-rebound performance in Game 6 of the 1980 NBA Finals. Not only was Magic a rookie playing in a series-clinching game, but an injury to center Kareem Abdul-Jabbar meant the starting point guard had to play out of position as center for most of the game. The feat showed Magic’s versatility and his clutch play, and was a testament to the adage that great players are able to adapt their games to any situation.

I don’t know any bankers or private equity guys nicknamed Magic, but a growing number of them are starting to play out of position, most notably as turnaround professionals.

A small handful—typically individuals—are launching their own advisory firms, pitching operational expertise to private equity firms, hedge funds and corporations. At the same time, mid-sized and large firms are staffing up with restructuring folks, while private equity firms and i-banks are dipping into the distressed pool.

None of this is all that surprising, especially for firms whose primary source of revenue is transaction fees. If you’re a mid-market investment bank and the deal flow isn’t there, you can’t just sit around and wait for the market to come back. And for many PE funds, there’s a need to put money to work now or run the risk of giving it back to your limited partners.

The concern, of course, is whether stepping out of your comfort zone to chase deal flow is a good idea. Within the private equity world, we’ve seen this happen a number of times. Back in the mid-to-late 1990s, several buyout firms bought minority stakes in telecom and tech companies, and most of them proceeded to get burned. Their mistake did not lie in the industries they selected, but rather in the shift from control investments to venture-style equity.

To be sure, this isn’t a commercial for dedicated turnaround firms and investors. Operational prowess should never take a backseat to accounting expertise, and buying and selling a distressed company requires many of the same skills as doing it with a healthy one. As such, I’m quite certain there are bright folks and firms who will be able to adapt, a la Magic, and succeed in this market.

Ultimately, though, the question is, how much of a stretch is it to play out of position? For the 6-foot, 9-inch Magic Johnson, playing in 1980, it was only a few inches vs. most centers. For some of the intermediaries who are pitching themselves as turnaround guys, it feels a bit more like Tony Parker posting up Yao Ming.

Adam Reinebach
adam.reinebach@sourcemedia.com