Distressed Debt Funds Slide Back into Spotlight

Jan 23, 2019 '

Distressed Debt Funds Slide Back into Spotlight

Distressed debt managers are primed for a new round of fundraising this year as investors see global economic hiccups setting the table for investments into troubled companies and deals. And that new investing cycle may spread even without a wave of loan defaults – the fodder for past rounds of distressed debt funds.

Stock market declines, interest rate policy moves, slowing growth rates, and even the five-week-old federal government shutdown have changed the mood for investors, giving many a sense that distressed debt strategies may have more opportunities this year, says Tim Ng, CIO at Clearbrook Global Advisors.

“There are a heck of a lot more interesting opportunities for distressed debt managers today than there were three to six months ago,” he says. “And that’s all without the economy in a recession.”

Investors have begun a broad “change in sentiment” toward hedging their private credit portfolios, many of which have grown “handsomely” in the years since the 2008 financial crisis, says Anton Pil, managing partner of the global alternatives unit at J.P. Morgan Asset Management.

“We’ve absolutely seen more interest in distressed from investors,” he says. “With valuations where they are and the economic cycle in later stages, they see the complexion of their private credit portfolios needs to start shifting. This was less prevalent 12 to 24 months ago [but] in the last six months, that has become a regular dialogue.”

And fund managers sense the moment, Ng says.

“Managers are on the warpath,” he says. “They’re out there raising capital. We’ve had lots of pre-marketing calls.”

Few institutional investors yet express great confidence that distressed debt is back, but they look at global events such as Brexit, a possible U.S.-China trade war, and market volatility and are asking questions, says Alan Pardee, managing partner at Mercury Capital Advisors, a placement agent.

“Everyone wants to be able to look around corners, but it’s hard to know exactly the moment that distressed makes the most sense,” he says. “But [limited partners] are asking themselves that question a little bit more in the past six months than in the last 18.”

Investors may well be primed to test the waters in distressed funds after four or five years of committing significant capital to drawdown-style private funds – some of which have not invested all their money in a highly priced market and instead returned it to investors, says Andrew Osofsky, principal at Mercury Capital.

“It should be an interesting year for distressed,” he says. “Do [investors] roll their capital back into similar strategies?”

The move to distressed may not be a surge but rather a tick upwards, according to some observers, such as KKR, whose global macro and asset allocations team, led by Henry McVey, added a percentage point to its FundFire is a copyrighted publication. FundFire has agreed to make available its content for the sole use of the employees of the subscriber company. Accordingly, it is a violation of the copyright law for anyone to duplicate the content of FundFire for the use of any person, other than the employees of the subscriber company. An Information Service of Money-Media, a Financial Times Company overweight position for distressed and special situations investing, lifting it to 4% from 3% in its annual outlook report. KKR’s report calls it “a walk, not run, idea, but if we are right about increasing volatility and late cycle behavior, we think our logic directionally makes sense.”

Certainly managers are looking to capitalize on the interest with new funds, with 48 distressed debt funds currently raising capital, seeking $37 billion in aggregate, according to Preqin data. Last year, 18 distressed debt funds closed with $21 billion overall, according to Preqin.

Three of the 10 largest private credit funds closed last year were distressed debt strategies, including a $7.4 billion vehicle from Blackstone Group’s GSO Capital Partners unit. And three of the top five private credit funds in the market are distressed products, led by $5 billion vehicles from Fortress Investment Group and Blackstone GSO’s distressed energy debt vehicle, according to Preqin.

KKR’s outlook sees a range of potential investment targets for distressed debt fund managers, including “success buying positions from lower-quartile direct lending managers and the banks that provided leverage to fund these investments during the recent periods of excess.”

But the next round of distressed debt products may not mimic past cycles with a heavy reliance on defaulted loans, because of changes in the lending marketplace, Ng says. Senior secured loan providers generally have focused on the strongest borrowers, while less stalwart companies have won loans with lighter terms and covenants – both of which mean that fewer defaults are likely in this cycle, he says.

That will turn fund managers to more “opportunistic” distressed investments, such as companies harmed by the market sell-off from last month, Ng adds.

“The target is going to be very specific companies with individual credit-focused problems,” Pardee says, citing a similar theme. “The idea is that in this environment, there could be more of them year to year.”

J.P. Morgan’s annual alts investing outlook also expects individual problems, such as poor company management or European bank balance sheets facing pressure to offer more investing targets, Pil says.

“So even if we don’t see a distressed cycle, there are plenty of opportunities,” he adds. “These can be one-off situations caused by regulatory changes or banks under capital pressure. These are the idiosyncratic issues of individual companies.”

There is also pressure on companies that need to refinance loans but face worse terms this year, which may result in additional opportunities, Ng says.

That brings an opening for distressed debt managers even if investors aren’t expecting “global financial crisis, take 2,” Pardee says. “The opportunity for distressed may increase if you hit a few speed bumps. Something is going to happen somewhere – a recession somewhere, a correction in the public markets.”

Mar 14, 2024

Capitol Meridian Partners Raises $900 Million for First Fund; Hits Hard Cap

Founder-friendly Capitol Meridian Partners invests in companies at the nexus of government and commercial markets Capitol Meridian Partners (CMP), a Washington, DC-based firm that invests in companies at the nexus…

Apr 19, 2023

Gates-backed MetaVC Partners raises $62m for debut fund

MetaVC Partners, which is backed by Bill Gates, has closed on $62 million for its debut fund to invest in start-ups working with new advanced materials. Besides Gates Frontier, Microsoft…

Mar 02, 2023

Mercury hires Glendower exec to lead on secondaries

Mercury Capital Advisors has hired an executive from Glendower Capital as partner to lead its secondaries advisory effort. London-based Devrup Banerjee joined Mercury on 1 February, according to a statement…

Nov 02, 2022

eWTP Arabia spotlights Arab-Asian collaboration at SuperReturn Middle East

Dubai, UAE: eWTP Arabia Capital, a leading Saudi Arabia and China based growth stage venture fund, is co-sponsor of SuperReturn Middle East, the leading private equity event serving the Middle East…

Jul 12, 2022

Mercury adds US secondaries advisory exec

The adviser and placement agent sees a growing opportunity in the US lower middle market, particularly in preferred equity. Mercury Capital Advisors has brought a new hire over from the…

Jul 05, 2022

Springwater Capital partners with Morningside Capital Management and LSV Advisors in a structured solution of a European portfolio of alternative assets.

Springwater, a leading pan-European special situations investment firm, received a preferred equity investment in a portfolio of European private equity assets with a value of over €100 million. Fresh capital raised will…

Feb 17, 2022

Infrastructure Managers Rake in $124B for
New Fundraising Record

Money poured into infrastructure funds at a record pace last year, powered by factors such as a post-pandemic rebound, a range of potential risk and return options and a wide…

Feb 15, 2022

Mercury Capital Advisors Boosts its US Origination and Distribution Capabilities

Mercury Capital Advisors announced today that it has added James Howe and Michael Dunham as Partners to further enhance its origination and distribution capabilities. Howe and Dunham are based out…

Dec 09, 2021

Mercury Capital Advisors Adds Masashi Hirose and Eugene Park to Growing Team

Mercury Capital Advisors announced today that it has added Masashi Hirose as Partner and Eugene Park as Principal to boost distribution and project management efforts for the firm, respectively. Hirose…

Sep 01, 2021

Gaw Capital Partners Takes Top Spot in APAC Fund Manager Ranking by PERE

September 1, 2021, Hong Kong – Gaw Capital Partners ranked first in PERE’s APAC Fund Manager Guide, a ranking based on capital raised over a five-year period, which shows the top 50 fund managers…

Jul 28, 2021

Mercury Capital Advisors Appoints Michael Ricciardi as Chairman Emeritus

Mercury Capital Advisors (“Mercury”), among the world’s elite global private fund placement and advisory firms, today announced that it has appointed Michael Ricciardi, Chief Executive Officer and Co-founder of the…

Jul 21, 2021

Mercury Capital Advisors Announces Four Senior Hires for Distribution Team

Mercury Capital Advisors today announced that it has added four senior professionals to amplify distribution efforts for the firm. Matthew Haimes, based in London, Jill Cohen and Jennifer Tunney, both…

Jul 12, 2021

10 Biggest Trends Shaping the Next 3 Decades, According to Big Investors

Institutional investors and family offices in a recent survey cite digitization, aging population and climate change as the most important trends that will shape the global economic landscape in the…

Jun 15, 2021

Investcorp partners with 17Capital to structure portfolio of alternative assets

17Capital, the global go-to source of strategic financing for investors in private equity, and Investcorp, a leading global provider and manager of alternative investment products, are collaborating to structure a…

Jun 03, 2020

Opportunity-Zone Funds Gaining Momentum

After a slow start, managers of opportunity-zone funds have been raising capital at an accelerated rate, according to Real Estate Alert’s second-annual review of the sector. Twenty-two sponsors working independently…

Apr 22, 2020

Oaktree Leads Rush of New Distressed Funds Seeking $30B

A wave of distressed debt and special situations funds has hit the market in recent weeks in response to the Covid-19 pandemic downturn, jumpstarting a segment that had dwindled to…

Apr 08, 2020

Crisis Sidetracks Fund Shops’ Equity Raises

The coronavirus chaos is taking its toll on fund managers’ capital campaigns. Operators across the country are postponing initial and final closes, or discuss­ing doing so, as investors focus on…

Mar 20, 2020

PE giants eyeing 2 opportunities amidst COVID

We talked to 14 private-equity insiders about how they’re planning to play the coronavirus turmoil. They identified 2 huge opportunities. Market chaos is creating crises and opportunities. Private-equity firms are…

Mar 20, 2020

LPs Slow Pledges to Debt Vehicles

Demand for high-yield-debt funds appears to have softened in the past year. The amount of equity raised by active closed-end vehicles is down for the first time since 2013, according…

Mar 18, 2020

Investors Tap the Brakes on Fund Commitments

After several years of explosive growth, the market for high-yield real estate funds is slowing. The total amount of equity managed in closed-end funds fell for the first time since…


By clicking on this link you will leave the Mercury Capital Advisors, LLC (“Mercury”) website and be taken to a website owned and operated by third parties. These links are provided for your information and convenience only and are not an endorsement by Mercury or the Mercury iFunds™ platform. Mercury has no control over the contents of any linked website and is not responsible for these websites or their content or availability. Mercury therefore makes no warranties or representations, express or implied about such linked websites, the third parties they are owned and operated by, the information contained on them or the suitability or quality of any of their products or services.