Distressed Debt In North America And Europe by Preqin
Distressed Debt In North America And Europe
Using extracts from the recently-launched Preqin Special Report: Distressed Debt in North America and Europe and additional data from Preqin’s Private Debt Online platform, we take a look at the growth of distressed debt and the performance of the strategy.
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As the economic crisis of the late 2000s unfolded, distressed debt-focused fund managers found themselves in an excellent position to capitalize on new investment opportunities. 2007 saw a then record $37.3bn raised by new funds focusing on Europe and North America, over six-times as much as the $6bn committed in 2006. 2008 was bigger yet, with strong institutional investor appetite enabling managers to close funds with commitments totaling $43.7bn – a record to this day. Fig. 1 shows annual fundraising in these regions solely within the distressed debt space, with a post-crisis high seen in 2012 at $27.7bn. Although annual fundraising for distressed debt funds has been consistently increasing since the nadir of $8bn committed in 2009, it has yet to recover to the pre-economic crisis levels – figures for 2015 reveal 11 funds closed, securing $21.4bn in total, and surpassing the $20.2bn secured for funds closed in 2014, even with five fewer funds closed.
What is striking about this period is the speed at which distressed debt managers were able to put this capital to use. Although there was a rise in dry powder of 72% between 2006 and 2007, from $23.3bn to $40bn, this is far below the 500%+ increase in capital raised between these two vintages (Fig. 2). Distressed debt dry powder levels actually fell between 2007 and 2008 by 17%, falling again slightly in 2009 before increasing consistently since. Dry powder reached a record $54.7bn in 2015 before declining slightly to $52.9bn in January 2016 – more than 30% higher than in 2007 and 2008. As of January 2016, distressed debt dry powder focused on North America and Europe accounts for a significant proportion of overall private debt dry powder at 30% ($52.9bn), second only to direct lending with 35% ($62.7bn). Not surprisingly, almost 95% of dry powder held in distressed debt funds is focused on either North American or European markets. The reason for this disparity between fundraising levels and dry powder has to do with the rate at which managers have put capital to work. Record investment followed record fundraising in 2008, while capital has been called at a more leisurely pace in recent years – allowing dry powder to rise while fundraising has recovered more slowly compared with historic highs.
With more capital sitting in older vintages, the pressure to put this dry powder to work is growing – most distressed debt funds employ a five-year investment period during which investors expect capital to be called and put to use. At present, we estimate 20% of current dry powder to be held by funds of vintage 2012 or older, with that figure rising to 43% when 2013 funds are included.
Funds in Market
There are currently 22 distressed debt funds in market seeking an aggregate $33.9bn for North American opportunities, compared with 10 distressed debt funds seeking €8.5bn (c. $9.4bn) for investment in Europe. Distressed debt funds currently account for 46% of capital sought by North America-focused private debt funds in market, compared with 22% for Europe-focused distressed debt funds.
Fig. 3 and Fig. 4 are illustrative of how institutional investor appetite for distressed debt funds has increased over time. Funds focused on North American opportunities are targeting 83% more capital than they were in January 2014. Similarly, the €8.5bn targeted by Europe-focused funds is more than three-times the amount sought at the beginning of 2014.
Fig. 5 and Fig. 6 list the largest private debt funds in market focused on North America and Europe respectively as of January 2016. Seven of the 10 largest North America-focused private debt funds employ a distressed debt strategy, compared with just three of the top 10 Europe-focused funds. Two distressed mega funds are on the road at the beginning of 2016, with Oaktree Opportunities Fund Xb and Centerbridge Special Credit Partners III seeking a combined $13bn.
For Europe-focused private debt funds in market, the top of the league table shows a more diverse mix of fund strategies than for North America-focused vehicles. The growth of the direct lending industry in Europe continues to hit its stride going into 2016, much like the growth witnessed in recent years in the US, as is reflected in three of the five largest funds on the road in Europe classified as direct lending vehicles. Distressed debt funds currently account for 22% of capital sought by Europe-focused private debt funds in market, compared with 46% for North America-focused distressed debt funds.
Preqin’s fund-level performance data powers a selection of benchmarking and analysis options, vital for any investor or fund manager’s toolkit. Fig. 7 shows how Preqin’s market benchmark data can be used to display the widening gap between the best and worst performing distressed debt funds, with funds of 2013 vintage requiring a net IRR of 11.5% to be considered top quartile, whereas to beat the median benchmark, 8.6% is required. In comparison, to be a top-quartile vintage 2011 fund, a net IRR of 17.0% is required, compared with a median net IRR of 9.5%. Vintage 2008 funds performed particularly strongly, generating the highest median net IRR (15.1%) and producing the highest top quartile boundary of 18.6%.
Fig. 8 shows the median called-up to committed capital, distributions to paid-in capital and residual value to paid-in capital ratios for distressed debt funds. Funds of vintage years 2007 and 2008 have performed particularly well, with large proportions of capital distributed back to investors (123% and 119% respectively). For vintage 2011 funds onwards, the majority of capital is still held in investments, with the proportion of capital distributed to investors much lower. The median called-up figure for 2013 vintage funds (67%) reflects how early in the investment cycle they are relative to other vintages, with most of the capital still to be called up.
Even with industry dry powder at near record highs at the end of 2015, fundraising shows no sign of slowing down, with 32 distressed debt vehicles in market targeting Europe or North America, seeking an aggregate $43.3bn. As always, investor sentiment will continue to dictate fundraising success in the upcoming year, although the large lines of credit required, as well as a high level of fund manager expertise, will likely result in a continuation in capital concentration among the largest and most experienced players.
Macroeconomic factors will also play a part in the demand for distressed debt from institutional investors. Recent stock market volatility and low oil prices have created opportunities for fund managers in the distressed debt space, and the prevailing low interest rates will likely see investors continue to target these high-yield opportunities in an attempt to capture attractive upside potential and effectively offset disappointing fixed income performance.
Preqin Industry News
With our feature article focusing on the distressed debt markets of North America and Europe, Oliver Senchal takes a look at investors looking to make commitments to the strategy and GPs seeking capital for distressed debt opportunities, as well as fundraising for distressed debt outside these markets.
Investors Targeting Distressed Debt Funds
Most investors targeting distressed debt investments consider doing so as part of a wider investment mandate, targeting distressed debt vehicles alongside other private equity fund commitments. However, UBS Wealth Management is exclusively looking to commit CHF 500-750mn to between five and eight distressed debt and private credit funds over 2016, investing globally with a particular focus on the US and Asia. Also solely focusing on distressed debt investment in 2016 is Industrial Bank of Kuwait, which is considering making one distressed investment, committing between $3mn and $7mn.
Targeting distressed debt as part of a wider mandate is Italy-headquartered Holding Italiana Quattordicesima SPA. The investment company is looking to commit to up to three private equity funds over 2016, committing €1-8mn per fund, targeting buyout, growth, distressed debt and venture capital funds. US-headquartered insurer Aegon Americas will also be making new commitments in 2016, looking to invest $250mn across multiple buyout and distressed debt funds.
Distressed Debt Funds in Market
So far in 2016, no distressed debt funds have reached a final close. However, the pipeline is stronger with 36 distressed debt funds in market currently seeking over $45bn from institutional investors, including 13 vehicles targeting $1bn or more. These large funds represent 82% of the total capital targeted by distressed debt funds in market, highlighting how capital is becoming concentrated among a smaller selection, of often the largest GPs.
Oaktree Capital Management has four distressed debt funds in market targeting $11.8bn in total institutional investor commitments. Oaktree Opportunities Fund X and its accompanying vehicle, Oaktree Opportunities Fund Xb, are seeking a combined $10bn to take non-control positions in corporate debt. Other large players such as KKR are also in market with their newest distressed debt offerings. KKR Special Situations Fund II is the second fund in its series, targeting $3.5bn for investments in a broad range of industries globally including consumer services, energy, healthcare, industrials and utilities. The fund held a fourth close in November 2015 on $2.7bn.
However, there are six fi rst-time distressed debt funds in market collectively targeting $2bn, including India-headquartered Piramal Capital seeking INR 60bn for Piramal India Resurgent Fund. Solely focused on investments in India, the fund is focused on acquiring stressed loans and potential turnaround companies, and providing rescue capital. First-time fund manager Stellex Capital Management is also seeking to raise a relatively large distressed debt fund, Stellex Capital Partners, which is targeting $750mn for distressed assets in the US and Europe.
Venture Capital Fundraising
Despite the number of venture capital funds reaching a final close declining, funds closed in 2015 secured more capital than in 2014. Harry Richardson utilizes Preqin’s Funds in Market database on Private Equity Online to look at venture capital fundraising by GP location, time on the road and fundraising success.
Investor Satisfaction with Returns
As part of our biannual Investor Outlook: Alternative Assets report, Preqin surveyed over 100 private equity investors to gain insight into the global LP community’s investment activities and attitudes towards the asset class. Here, Joanna Nye presents the results relating to investors’ expectations of fund performance.
Private Equity Fund of Funds Performance
Lisa Parker provides an overview of private equity fund of funds performance using Performance Analyst on Private Equity Online, examining returns over time and providing a comparison against private equity returns as a whole.
The proportion of total deal value represented by secondary buyouts in 2015 declined to its lowest level seen since 2009. Anthony Leung takes a close look at secondary buyout activity over time using Preqin’s Buyout Deals Analyst database on Private Equity Online.
Rise in $100mn+ Venture Capital Deals
2015 proved to be a record year for the value of venture capital financings and crucial to this was the number of larger deals completed at $100mn or more. Emily Forbes presents a summary of this deal activity by year, tracking the changes seen over time.
H2 2015 Secondaries Fundraising
In a reversal of the trend seen in the first half of 2015, H2 2015 saw more secondaries funds reach a final close but secure less capital. Andrew White analyzes the semi-annual fundraising statistics.
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