Are the Recovery Assumptions Right?
Understanding the dependencies, dynamics and risks
that may affect recovery outcomes.
Insight
What Matters Most?
Have the assumptions underpinning the turnaround thesis been properly tested?
Areas of Inquiry
What drove the distress: operational issues, governance failures, misconduct, or a combination of these factors?
Are key customer relationships or operational capabilities dependent on a small group of individuals?
Does the business depend on critical counterparties?
Are key operations reliant on informal management practices?
Are performance assumptions dependent on industry practices or informal arrangements?
In distressed and special situations investing, recovery and value creation are ultimately driven by a set of assumptions.
Operations are expected to stabilise. Performance is expected to recover. Key relationships are expected to be retained. The turnaround plan is expected to succeed.
The challenge is determining whether those assumptions have been properly tested.
Hidden Sources of Execution Risk
Understanding the source of distress is often the starting point. While some businesses fail due to operational challenges or poor decisions, others may be affected by governance failures, misconduct, undisclosed conflicts or a combination of factors.
Recovery can also be influenced by dependencies that are not immediately visible. Customer relationships, critical products or commercial arrangements may be concentrated around a small group of individuals. Employees may need to adapt to new ownership and governance standards. Stakeholder issues, local dynamics and industry-specific practices may also affect operational continuity and execution.
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