Private debt fundraising gains popularity as credit stress returns

The lull in demand for distressed debt, caused by low interest rates and a record economic expansion, may have broken this year. Private debt funds raised $55.5bn in the first six months of 2020, about $1.1bn more than they collected in the same period last year.

That increase might not reflect investor response to the pandemic, given that it generally takes at least six months to launch and close a new fund. But in first half surveys of limited partners this year, the percentage interested in targeting distressed-debt funds surged to 60% from 38% in the same period last year, Preqin said, while interest in direct lending and mezzanine declined.

Investors are hungry for strategies that back companies hit by the pandemic’s economic fallout, according to placement agents and consultants. “We’re seeing a lot of interest in some of the opportunistic distressed strategies. People have viewed that as an area where they can be tactical and take advantage of dislocations in the credit cycle,” said Todd Silverman, who leads private equity research at consulting firm Meketa Investment Group.

Interest in credit funds fluctuated over the first half, from a low level in January to a spike in March, followed by a decline after the US government stepped in to stabilise the corporate debt market, said Alicia Cooney, co-founder of consulting firm Monument Group.

But in late June and early July, with Covid-19 again spreading rapidly in the US, interest in distressed debt and special situations vehicles revived as investors expected the pandemic to bring new dislocations, she said.

Funds aiming to back struggling companies became investors’ favourite type of private credit vehicle in the second quarter, as investors began to grapple with the coronavirus pandemic and the economic distress it has caused. Although direct lending funds accounted for the most capital raised during the first half of the year, special situations funds and distressed debt funds experienced a significant bump in capital raised in the second quarter.

Special situations funds raised $12.2bn from 1 April to 30 June – roughly 80% of the $15.3bn they raised during the first half of the year. Distressed debt funds, meanwhile, collected $9.7bn in the second quarter, around 90% of the $10.8bn they collected for the first six months.

The largest private credit funds to close in the first half pursued a mix of investment strategies, according to Preqin. The largest was Clearlake Capital Group’s $7bn sixth fund, which focuses on special-situations deals; followed by Blackstone Group’s GSO Capital Partners’ second European senior debt fund, at $4.55bn.

The largest strictly distressed debt funds raised in the first half were a $3.2bn offering from Bain Capital and KKR’s $2.8bn KKR Dislocation Opportunities Fund.

Private credit managers have moved quickly to capitalise on the increased demand during the pandemic, with 50 new funds coming to market between January and July, according to Preqin. Private credit managers are seeking to raise a total $239bn worldwide, $47bn more than they were in January, the data show.

Source: WallStreetJournal