Concerns increased during 2014 that demand was surpassing supply for distressed private equity opportunities. Contributory factors included improving economic conditions in Europe and North America, a high availability of debt from low interest rates and high levels of available dry powder for distressed private equity firms. Preqin’s Funds in Market online service shows that distressed private equity funds, which include special situations, distressed debt and turnaround vehicles, experienced a significant decrease in fundraising during 2014.
Distressed private equity funds raised $28.1bn in 2014, in contrast to $36bn in 2013, as shown in the chart above. All regions experienced a decline in aggregate capital commitments, except for Europe, which accumulated 13% more capital in 2014 than 2013. Seventy-two percent of all distressed capital was gathered by North America-focused funds; however, the region also saw a 29% reduction in funding from 2013. With the improving US economy reducing investment opportunities available to firms focused on distressed private equity, experienced managers that have a background in sourcing the most profitable opportunities raised all of the 16 North America-focused vehicles that closed in 2014. Despite a promising year in 2012 for Asia, which saw the region amass $7bn in total capital commitments, distressed private equity fundraising has since declined for two consecutive years and now stands at $1.9bn.
The average time taken to reach a first close doubled from four months in 2013 to eight months in 2014 – a record high for distressed private equity funds. The average number of months taken to reach a final close also increased to 15 months in 2014, up from 13 months in the previous year. While 100% of the target size was secured at final close, 2014 represented the first year that target size has not been exceeded since 2010. The average percentage of target size at first close nevertheless remained the same as in 2013 at 43%.
The 10 largest distressed funds to close in 2014 together accumulated a total of $21.6bn, 79% of all capital raised. The largest fund to close in 2014 was Centerbridge Capital Partners III, a distressed debt vehicle with a diversified industry focus targeting US investments. The second and third largest vehicles used special situations and turnaround strategies respectively, indicating a diverse representation across the distressed private equity space.
Looking to 2015, the distressed private equity market is expected to remain challenging. Interest rates in Europe and North America remain low and there is the availability of debt from banks and direct lending funds. Despite the decrease seen in 2014, North America will most likely continue to dominate distressed private equity fundraising, with 43 North America-focused funds currently in market looking to raise $37bn (68% of all distressed private equity funds), although the return of macroeconomic uncertainty in parts of Europe could encourage a further increase of LP capital to the region.