Published: Monday, 1 Mar 2010 | 3:45 PM ET
By: Reuters
U.S. manufacturers are still struggling with the economic downturn and there is substantial risk the U.S. economy could face a double-dip recession, a private equity investor who specializes in turning around struggling industrial companies said Monday.
"I think there is a very real possibility of a double dip out there," said Michael Psaros, co-founder and managing partner of KPS Capital Partners LP.
He cited the distress he continues to see among U.S. manufacturers.
"Washington cannot continue to spend money like it has. When that stimulus stops, I don't think there is sufficient private market consumer demand to run with," Psaros said at the Reuters Private Equity and Hedge Funds Summit in New York on Monday.
Psaros oversees $2.6 billion in funds, specializing in turnaround, restructuring and bankruptcy situations. In the past year his firm has done deals that acquired the maker of Waterford and Wedgwood crystal, and owner of High Falls Brewing Company. It also owns HHI holdings, a U.S. auto parts maker that specializes in wheel bearings.
He said that while the markets may be recovering, there is a "disconnect" between the market and what is happening on the ground at U.S. manufacturers, where the effects of a deep decline that started in 2008 are still being felt.
"In June 2009 we hit bottom, and since that time the industrial manufacturing economy has continued to remain at the June 2009 levels," Psaros said.
"Until this country puts 25 million Americans back to work, we're in a recession."
Psaros said the risk of a double-dip recession was greater than 50 percent, partly because so many companies were only putting "Band-Aids" on their problems by extracting agreements from lenders and bondholders to cut or delay debt, without really fixing their companies.
"I think a lot of the professionals that are sitting in banks and financial institutions were prepared to kick the can down the road, once, maybe twice, but when you have a borrower who has essentially defaulted on its obligations on more than one occasion, it gets to a point where you are looking at a regulator in the eyes and you have to fess up and say you made a bad loan."
Psaros said he expects a "crescendo" of failures to appear over the next few years as lenders and companies struggle with these agreements.
But for companies that are focused on cost management and aligning their businesses to a new reality, Psaros said he sees a brighter future.
"If and when we have an economic recovery, for manufacturers like us that have cut costs so much to the bone, it's not going to take a lot of revenue growth for cash flow to turn into profits," Psaros said.
