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.”