Since the financial downturn, distressed private equity has become an attractive investment strategy among both institutional investors and fund managers looking to gain exposure to companies in financial distress, often as a result of the difficult economic climate. With the potential to take equity or debt stakes in companies in a state of undervaluation, impressive returns are a clear possibility for investors.
Preqin’s database shows that there are currently 61 distressed private equity funds on the road (including distressed debt, special situations, and turnaround vehicles) targeting an aggregate of $44bn in capital commitments from institutional investors. This is exactly the same number Preqin registered in market in Q3 2011 and slightly higher in comparison to Q3 2010, when 57 distressed private equity funds targeted $40bn. One of the largest distressed private equity vehicles on the road, seeking $3.75bn, is Cerberus Institutional Partners (Series Five). The distressed debt vehicle recently held its first close at $1.1bn. Sankaty Credit Opportunities V, which is seeking $3bn, will focus on investment opportunities in performing and distressed bank loans, high yield bonds, mezzanine and special situations mainly in the US.
Despite continued interest from investors in distressed private equity, appetite for this level of risk among the investor community is not as strong as it was a year ago. Preqin’s Investor Outlook: Private Equity – H2 2012, which surveyed 100 institutional investors, reveals that only 13% of respondents view distressed private equity as presenting the best opportunities and only 9% plan to invest in the fund type over the coming year. This is a decrease from Preqin’s H2 2011 survey, in which 23% of respondents considered distressed private equity an appealing investment and 24% of LPs interviewed were planning to invest in this area of private equity.