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The Performance of Distressed Private Equity during Market Instability

by Gary Broughton

  • 02 Dec 2011
  • PE

Distressed private equity is a niche strategy which seeks to buy equity, debt or trade claims at deep discounts of companies in, or facing, bankruptcy. During 2008 and 2009, market turmoil and the introduction of mark-to-market valuation policy accounted for the write-downs of many portfolio company valuations. As a result of this market instability, opportunities for distressed private equity investments increased dramatically; however, how does the performance of distressed private equity compare to other fund types?

As the investment cycles of funds with vintage years 2007-2008 coincide with the height of the turmoil surrounding the financial crisis, we can gain insight into the performance of different private equity fund types during periods of increased market instability by examining the median net IRR by fund type for these recent vintage years.

The median net IRR figures of 2007-2008 vintage funds show that distressed private equity is currently outperforming buyout, growth and venture funds of the same vintage year. In particular, vintage 2008 distressed private equity funds are showing a median net IRR of 16.2%, compared to 9.1% for growth, 6.6% for buyout and 1.9% for venture. This indicates that distressed private equity funds are faring better, and are able to offer outperformance in periods of market volatility and economic uncertainty. Despite this, however, it is important to note that these funds are still early in their fund lives and consequently performance could change as fund managers add value to their investments and portfolios mature.

What does this mean for the near-term future of distressed private equity funds? With concerns regarding European sovereign debt, global markets experiencing uncertainty and a decline in the unavailability of debt, opportunities to make distressed private equity investments are likely to remain high.

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