As someone who makes a business of distressed investing, Gary Talarico can glean the face of failure written across companies that his firm, Sun Capital Partners Inc., routinely vets. Yet even in trouble-prone sectors such as retail, consumer and auto parts, Talarico and his New York-based team of 20 professionals can pick out companies where they see "good value."

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These might be run-of-the-mill regional convenience store chains in the Southeast, such as Worsley Operating Corp. and Li'l Cricket Food Stores Inc., both of which Sun acquired in March, or an ordinary Midwestern retailer like Marsh Supermarkets LLC, purchased in 2006. Such businesses fill a need in times of recession, says Talarico.

In many cases involving retail, Sun used real estate assets in order to finance transactions.

"In a sale-leaseback, if the multiple paid by real estate investors for the real estate is higher than the Ebitda multiple we paid for the business, then the effective purchase price is a lot lower than the headline price," Talarico says.

This was the case with Marsh Supermarkets; Friendly Ice Cream Corp. (acquired in June 2007); Boston Market Corp. (August 2007); Worsley and Li'l Cricket, as well as numerous add-ons for Village Pantry LLC, an Indianapolis convenience store operator.

Talarico also led the sale of Shopko Stores Inc.'s real estate assets to Spirit Finance Corp. for $815.3 million in 2006, following Sun's acquisition of Shopko in October 2005 for $1.2 billion.

"Gary has had tremendous success in unlocking value from a lot of good assets," says Steven Navarro, a partner with Morgan, Lewis & Bockius LLP.

After the credit crunch derailed large buyouts last year, Sun soldiered on, buying about 20 companies in the first two quarters this year, many enabled by sale-leasebacks and bridge financing from Sun. But pricing has tightened since, and the sale-leaseback markets have dried up, too.

Among his colleagues, Talarico, who worked at Lehman Brothers Inc. for 15 years, sees himself as "the most pessimistic" on the economy: "It's going to be deep. We're budgeting for a much, much harsher environment. The illiquidity in capital markets and the dislocations are scary," he says. "I think it will be a terrible holiday season for retailers. Car companies are on the ropes. Banks are still in bad shape, and people will be shedding more jobs."

That makes buying -- and running -- troubled companies even trickier. In auto parts, Talarico says he found a unique opportunity earlier this year to buy Mark IV Industries Inc., a $1.2 billion manufacturer of high-performance automotive systems and parts based in Amherst, N.Y., and Airasca, Italy.

London's BC Partners Ltd. and other investors, which bought it in 2000 for roughly $2 billion, had sold it for a big loss. Sun managed to get the lenders to roll over about $900 million in debt, then split up the group into four operating units.

Two units focusing on fuel efficiencies and lower emissions, with revenue in the U.S. and Europe, could face a severe downturn. But the other two -- Intelligent Vehicle Highway Systems, which owns the E-ZPass electronic toll system, and Information Display Systems, which makes display and lighting products for the transport sectors, have significant growth potential, Talarico says, though admittedly none of these can be monetized anytime soon.

While casual dining has suffered, Talarico says Sun's low-end restaurants with "unique concepts" are still faring well. For working families, "Boston Market is meal replacement, and its menu is healthier than burger joints," he adds. Sun's operating team can extract improvements in cost savings inside stores while building share with increased marketing.

Growth in difficult markets doesn't matter as much because they're doubling the margins, argues Talarico. Wilmington, N.C.-based Worsley, with 124 stores, and Spartanburg, S.C.-based Li'l Cricket, for example, offer economies of scale. The biggest challenge, he says, has been fuel costs.

All this is familiar terrain for Boca Raton, Fla.-based Sun, which specializes in undermanaged and underperforming businesses. About 45% of the companies it buys -- 87 now -- have negative cash flow.

A native of Illinois, Talarico worked 12 years in Japan with Lehman and later with Deutsche Bank AG. Talarico spent part of his time in Japan navigating financial institutions' restructuring efforts in the '90s. He and then-Lehman colleague Rodger Krouse advised on Hong Kong's Tung Shipping Group's restructuring in 1986. Krouse and another Lehman alum, Marc Leder, went on to launch Sun in 1995.

Once back in New York in 2002, Talarico, fluent in Japanese, ran into Krouse, who speaks Chinese, on the street. Months later, Krouse asked Talarico to join Sun.

Talarico and his wife have two children -- a son, 13, and a daughter, 7, whom the couple adopted from China. Now in his 50s, Talarico holds undergraduate and graduate degrees in sociology and political science from Illinois State University. He has a master's in international economics and Asian studies from the Paul H. Nitze School of Advanced International Studies at Johns Hopkins University.

A board member of the Japan Society in New York, he has a keen eye for Japanese woodblock prints.

Like everyone else, Sun has its share of bankruptcies -- five to date this year. These include retailer Mervyn's LLC, trucker Jevic Holding Corp. and direct-mail catalog Lillian Vernon Corp.

"We're going to have failures," Talarico concedes. "But we do a high volume of deals -- we did 39 last year -- so if we lose 5% or 10%, we're no worse than the average firm." It also invests modest sums -- the largest equity check might be about $100 million, its effective cost for Mark IV.

With $10 billion in committed capital, Sun boasts aggregate internal rates of return on funds in excess of 30%.

When buying companies, says Talarico, the firm must make "reasonable assumptions" based on how the businesses performed in the last downturn. Ultimately, he says, "you have to buy right, make sure you have enough run room and protect your downside. But it's an art, not a science."

See Deal Video coverage of Gary Talarico on assessing risks and opportunities, distressed investing and Lehman's collapse.