Distressed private equity, which consists of distressed debt, turnaround and special situations vehicles, has been an increasingly prominent area of the private equity sector since the start of the financial crisis in 2007. Since then, many investors have looked to gain a foothold in the distressed private equity market as credit markets have remained tightened towards both companies that are under financial duress and firms that are healthy and experiencing liquidity issues.
Preqin's Investor Intelligence service currently tracks 5,035 active investors in private equity, of which 1,448 (29%) have either previously invested in distressed private equity vehicles, or expressed a preference for doing so. North America-based LPs make up the greatest proportion of distressed private equity investors, with 69% based in the region. LPs in Europe account for the second highest proportion of investors (19%), with Asia and investors based outside of these core regions accounting for the remaining 12%.
The top four investor types with an appetite for distressed private equity each account for a similar proportion of active investors in the fund strategy. Private sector pension funds and foundations each account for 15% of LPs investing in distressed private equity vehicles. Endowments represent 14% of active investors and public pension funds a further 13%.
Investor appetite for distressed private equity vehicles has continued in 2013, with many LPs deploying capital to the fund type, including Texas County & District Retirement System (TDCRS), which committed $30mn to KPS Special Situations Fund IV, a US-focused special situations fund. Both TDCRS and the Los Angeles County Employees' Retirement Association (LACERA) approved commitments of $35mn and $100mn respectively to Marlin Equity Partners IV, the fourth special situations vehicle offered by Marlin Equity Partners.
There is still a significant amount of interest in distressed private equity vehicles, as slow global growth and a difficult economic recovery has led to continued tightened credit markets; 403 LPs are expecting to either actively or opportunistically target distressed private equity vehicles in the coming year. This specific niche of the private equity universe is likely to continue to remain strong as economic uncertainty in the global markets continues.