The start of the global financial crisis in 2007 saw distressed private equity become progressively more popular amongst LPs, given the increased number of opportunities available. A record $54bn was raised by distressed private equity funds in 2008, $29bn of which was raised in Q2 2008 alone. Following the unprecedented volatility caused by the European sovereign debt crisis in 2011, it appears that distressed private equity has once again become a favorable investment choice amongst LPs.
For example, Pennsylvania Public School Employees' Retirement System (PSERS) has recently made a number of commitments to distressed private equity funds. It committed $200mn each to Apollo European Principal Finance Fund II and Cerberus Institutional Partners (Series Five). Apollo Global Management’s fund, focusing on investment opportunities in Europe, has also attracted a number of commitments from other US public pension funds, including Louisiana State Employees' Retirement System and San Bernardino County Employees' Retirement Association. PSERS also committed $350mn to Sankaty Credit Opportunities V, a distressed vehicle set to focus largely on investment opportunities in the US. Another investor in Sankaty Advisors’ fund is US-based sovereign wealth fund, New Mexico State Investment Council.
Preqin’s 2012 Global Private Equity Report highlights that 26% of investors are seeking to invest in distressed private equity funds over the course of 2012. This is a significant increase compared to the 9% of investors that were planning to invest in distressed private equity funds in 2011.Preqin’s Investor Intelligence database currently tracks over 4,000 active investors in private equity, of which over a quarter (28%) have an appetite for distressed private equity funds. Additionally, of those that have this preference, over half (53%) will invest in first-time funds (including spin-offs).
In terms of the geographical make-up of investors that have a preference for investing in distressed private equity, 66% are based in the US, with European-based investors making up 22% of the total, and LPs located in Asia and Rest of World representing the remaining 12%. In looking at the types of investors that currently seek distressed private equity opportunities, foundations and public pension funds each represent 16% of LPs that have an interest in distressed private equity. Distressed private equity is also popular among endowment plans, accounting for 15% of the LPs with an appetite for investing in these funds.