In many of the world’s economic markets, the themes of 2013 and 2014 have been about regaining stability, growing confidence, and the need to reduce debt burdens that were augmented during the years of financial turmoil. This is true for many of the developed economies across the globe as well as sovereign entities, public companies and private firms. Preqin’s figures show that the private equity industry has benefitted from this renewed confidence, with 2013 and Q1 2014 both proving to be relatively strong periods for both fundraising and deploying capital alike.
However, this lauded performance is slightly skewed, with the successes more noticeably felt by the large, well-established buyout fund manager over other types of private equity strategies. Behind the clamour of these large players, distressed private equity fund managers in particular have somewhat failed to enjoy as much success as their counterparts pursuing more ‘traditional’ private equity buyout strategies.
According to Preqin’s Funds in Market online service, distressed private equity funds (which include Distressed Debt, Special Situation and Turnaround vehicles) are currently seeking to raise just 21% of the target capital that buyout funds are pursuing. In fact, the $38bn that distressed-focused fund managers are in the market for is the lowest amount of capital targeted by the group since 2007. This figure has particular resonance given the fact that many are acclaiming an opposite trend for the industry as a whole, having posted the best figures in Q1 2014 since Q1 2008, and the largest year-long figures in 2013 since 2008. This further demonstrates the contrasting fortunes of private equity depending on the chosen investment type.
In 2008, distressed private equity fundraising reached a peak of $70bn. In the height of the financial crisis, distressed private equity fund managers saw an opportunity to invest in the numerous businesses which needed capital to inject into failing operations as economic growth plummeted. While buyout and venture capital funds struggled to provide investors with high returns as the economy floundered, distressed-focused fund managers attracted the attention of LPs with the promise of great positive returns despite the economic climate. The amount of capital that buyout fund managers collected decreased for four years in a row from 2007, when they garnered almost $250bn, to 2011, when they cumulatively raised just over $77bn - representing a significant 70% fall in the level of capital successfully accumulated.
Preqin’s Fund Manager Profiles online service shows that distressed private equity fund managers are sitting on a cumulative $76bn of dry powder. This large amount of capital could take some time to be invested in a market that is already nearing saturation, particularly as over two thirds of the capital (67%) is pegged to invest in North America.