Distressed private equity, consisting of distressed debt, special situations and turnaround vehicles, is an important part of the private equity industry. Since the financial crisis of 2007, credit markets have tightened, with access to such finance drying up for companies that face financial difficulty, allowing a niche for private equity to exploit.
Of the 5,907 active investors in private equity on Preqin’s Investor Intelligence database, 1,684 have either previously committed to or currently show an interest in investing in distressed private equity funds. North America-based LPs are the most prominent distressed private equity investors, with 69% of global investors with a preference for the fund type being based in this region. Europe-based LPs make up the second largest proportion (18%) of investors interested in distressed private equity investments.
The top five LPs in the distressed private equity space together have exposure to approximately 231 funds. California Public Employees' Retirement System (CalPERS) is known to have committed to 59 distressed private equity funds, while Pennsylvania State Employees' Retirement System has committed to 49 funds. John D. and Catherine T. MacArthur Foundation (44 funds), California State Teachers' Retirement System (CalSTRS) (40 funds) and Oregon State Treasury (39 funds) make up the rest of the top five. Notable commitments made recently by these investors include $150mn by CalPERS to Centerbridge Capital Partners III, $75mn by Pennsylvania State Employees' Retirement System to the Clearlake Capital Partners IV fund and $200mn by CalSTRS to Fortress Credit Opportunities Fund IV.
Preqin’s latest Investor Outlook survey for H2 2015 gives us an idea of the outlook for distressed private equity funds over the coming 12 months. Seventeen percent of investors surveyed rated distressed funds as the strategy presenting the best opportunities in private equity (up from 16% in June 2014), with 17% of investors seeking to invest in this vehicle type over the next 12 months (down from 24% in June 2014). Distressed private equity placed third in the overall rankings for fund types presenting the best opportunities in private equity, according to LPs, behind only the more traditional strategies of buyout and venture capital.
Evidently, there is still a significant amount of interest in distressed private equity, despite the historically low interest rates set worldwide by central banks and expectations for a fall in default rates. Opportunities within distressed private equity are likely to remain stable, however, as economic uncertainty in global markets continues, highlighted by situations such as the fragile eurozone and the current economic struggles in China.
*Respondents were not prompted to give their opinions on each fund type individually but to name those they felt best fit these categories; therefore, the results display the fund types at the forefront of the investors' minds at the time of the survey.