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Alternative Market Briefing

With lacklustre performance, distressed debt hedge funds raise only $2.5bn in 2019 so far

Wednesday, May 22, 2019

Laxman Pai, Opalesque Asia:

The market conditions suggest a potential opportunity for distressed debt funds, but fundraising has yet to pick up, said a report by Preqin.

Distressed debt has long been a major component of the private debt industry. At the time of the Global Financial Crisis (GFC) distressed debt funds raised record levels of capital and saw record performance, as funds took advantage of distressed opportunities.

The majority of investors now feel the market is at a peak again, and 35% expect a correction within the next 12 months. But distressed debt funds have not yet seen the same uptick that they witnessed in 2008.

For the time being, the strategy remains less attractive to investors than either special situations or direct lending funds, and fundraising has totalled just $2.5bn in 2019 so far.

Performance has been lacklustre too, lagging both mezzanine and direct lending funds in the year to September 2018.

"Given that many investors feel we are late in the market cycle, we might expect to see increased interest in distressed debt funds. These vehicles managed to capitalize on the previous major market correction, but investors do not yet seem to be flocking to them in this cycle. This may be partly because investors believe sectors like direct lending - which was very much a nascent industry in 2008 - will offer better opportunities in a downturn. But it may also be simply a case of capital build-up," said Tom Carr, Head of ......................

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