Strategic Value Partners (SVP) is targeting $6.5bn for its latest distressed debt fund, marking a 30% increase from its $5bn predecessor, which closed $1bn oversubscribed in 2021.

The firm is betting on a surge in distressed opportunities as rising interest rates and economic headwinds pressure over-leveraged companies.

The fundraising goal for Strategic Value Special Situations Fund VI was disclosed during a recent meeting of the New Jersey State Investment Council, which committed $100m to the fund. SVP declined to comment on the fundraising efforts.

Founded by Victor Khosla in 2001, SVP focuses on acquiring debt from middle-market, asset-heavy companies in legacy industries. According to New Jersey SIC Chief Investment Officer Shoaib Khan, the firm’s strength lies in its ability to source investments at competitive prices, particularly through direct sourcing. SVP has significantly increased its direct deal flow, with 80.5% of Fund V investments coming from banks and private credit firms, up from just 7.4% in Fund I.

Fund VI is targeting a 15% internal rate of return (IRR), consistent with the performance of its last four funds. The broader distressed debt market has seen increased activity as inflation, economic uncertainty, and higher borrowing costs weigh on highly leveraged firms. Sectors such as retail, real estate, and energy are presenting growing opportunities for private equity and hedge funds focused on distressed assets.

Investor interest in distressed debt strategies remains strong, with Preqin reporting that limited partners (LPs) consider it the most targeted approach within private credit. Earlier this month, Oaktree Capital Management closed its Oaktree Opportunities Fund XII at $12bn, further highlighting growing appetite for distressed investments.