Angus C. Littlejohn Jr. got tired of losing out to swifter hedge funds on some fine deals, and so his $1.3 billion middle-market private equity firm added hedge fund-like trading capabilities.
Mr. Littlejohn and his firm, Littlejohn & Co. LLC, are not alone. A number of buyout firms that focus on distressed companies have added trading groups, hoping that the ability to buy and sell debt securities would make them more nimble. Sun Capital Partners Inc., Boca Raton, Fla.; and Centerbridge Partners LP, New York, a firm formed in 2006 by Mark Gallogly, former head of private equity at Blackstone Group, and Jeffrey Aronson, former head of distressed investing at Angelo Gordon & Co., both straddle traditional private equity and hedge fund investment worlds.
These firms are not restricted to taking majority interests in private companies but, like Littlejohn, can buy non-control stakes in distressed firms as well as take control and non-control stakes in troubled companies' publicly traded debt. Later, the debt can sometimes be converted into control equity ownership of companies. Executives at Littlejohn expect the flexibility might give them an edge during a market downturn.
“We expanded the organization to include trading and distressed securities on the theory that it was an important defensive move,” said Mr. Littlejohn, chairman and chief executive officer of the eponymous Greenwich, Conn.-based firm.
In the past, Littlejohn and other distressed buyout firms could buy large chunks of debt directly from banks. That strategy became extinct when the banks started turning that debt into securities and distressed buyout managers could buy debt only in tiny slices at a time. Having a hedge fund capability gives Littlejohn and other distressed managers the ability to make money on the tiny pieces of debt when they can't aggregate them into a majority stake.
“In the last few years, less-than-stellar companies had no problem refinancing their debt and could get a better deal than they had before. That's gone,” Mr. Littlejohn said. “Now when companies bust their covenants, they will have to do something. They can't refinance. They will become underperforming debt.”
This is where trading comes in. Having a trading capability gives private equity firms that once could buy controlling interests only in companies with the ability to take minority debt positions in companies — that's important, he said, because the recent credit crunch has created more non-performing debt situations.
“If anything the market is going in our direction,” he said.