Consider this: A successful private equity fund owns a Delaware portfolio company that manufactures propellers for crop dusters. Formerly profitable, the company has lost a major contract and is now insolvent by any measure.
The board (hand-picked by the fund) is considering two options: an asset sale that could net creditors as much as 80 cents on the dollar; or diverting the company’s limited resources to research and development of small drones capable of delivering beer to fans at an NFL game. The latter strategy, while plainly risky, has at least a “rational,” if long-shot, possibility of adding value to the company and even producing an equity return to the fund. (After all, no less a visionary than Jeff Bezos has proposed using drones for home delivery of Amazon merchandise.) If unsuccessful, however, ultimate recovery by the creditors could be significantly reduced.
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