Among the three most well-funded private debt fund strategies, distressed debt represents the smallest proportion of funds in market, yet its average fund size is significantly larger than that of both direct lending and mezzanine vehicles. The chart below shows that of the 183 funds tracked by Preqin’s Private Debt Online utilizing these strategies, the average target size of distressed debt funds in market is $1.6bn, while the average direct lending and mezzanine fund targets are $542mn and $305mn respectively. Distressed debt currently represents just 27 of the 183 funds currently in market, significantly less than either of the other two strategies.
The market is currently dominated by mega-fund managers accounting for the majority of activity in the distressed debt space, with 15 funds in market currently seeking over $1bn in capital commitments. Oaktree Capital Management, Fortress Investment Group and KKR are some of the prominent fund managers that are currently raising distressed debt vehicles. By nature, distressed debt investment requires large lines of credit for struggling enterprises, as well as a high level of fund manager expertise. For these reasons it is logical that the distressed debt fundraising market would see a cluster of large funds from experienced players emerge near the top. One reason why these managers are able to attract such large sums of institutional capital could be the high-risk nature of such investments; institutional investors tend to favour more established managers with solid track records, which allow investors to more closely assess the risk of their investment.
Demand for these investments is apparent in the number and size of fund closures recently as a result of economic cycles that may soon present opportunities for managers both in Europe and North America. This is headlined by Oaktree Opportunities Fund Xb, which recently closed on $7bn and continues to target a $3bn close for Oaktree Opportunities Fund X, the primary vehicle that the opportunistic Fund Xb will accompany. The demand for credit opportunities from companies in the energy market, as a result of low oil prices, has also cultivated increased opportunity for fund managers in the distressed debt space. Another potential reason why institutional investors may be targeting these alternative high-yield opportunities is to cope with the low-yield environment in an attempt to capture attractive upside potential and effectively offset disappointing fixed income performance.