Distressed private equity, which consists of distressed debt, special situations and turnaround vehicles, has been seen as a prominent area in the asset class, especially since the start of the financial crisis in 2007. Since then, investors have been quick to recognise the opportunities that distressed private equity offers when companies suffer liquidity issues and credit markets are tightened.
Preqin’s Investor Intelligence currently tracks 5,359 active investors in private equity, of which 1,586 (30%) have either previously invested or expressed a preference for investing in distressed private equity vehicles. North America-based LPs make up the greatest proportion of distressed private equity investors with 69% based in the region. Europe-based LPs account for the second highest proportion of distressed private equity investors (18%), with Asia-based LPs and investors based in economies outside of North America and Europe accounting for the remaining 13%.
A comparison of the bi-annual surveys of 100 investors carried out by Preqin in mid-2013 and mid-2014 reveals a slight increase in the proportion of investors surveyed seeking to invest in distressed private equity vehicles. In June 2014, 24% of investors surveyed said they would be investing in distressed private equity that year, compared to 20% of those surveyed in June 2013.
Such investor appetite for distressed private equity exposure can be seen in the recent commitment by Pennsylvania Public School Employees’ Retirement System (PSERS) of $100mn to Centerbridge Capital Partners III, a distressed debt vehicle managed by Centerbridge Capital Partners. Minnesota State Board of Investment is also among investors to have committed capital to Varde Fund XI, a distressed debt vehicle that recently closed at $2bn.
Although global credit markets have recovered substantially since the height of the financial crisis in 2008, there is still a significant amount of interest by investors in exposure to distressed private equity. As macroeconomic uncertainty in Europe continues, the opportunities for substantial return on capital provided by distressed private equity fund managers will entice a significant proportion of the global institutional investor community.