Home >Industry >Banking >Distressed debt funds out of favour in 2019, shows report

Distressed debt-focused fund managers have managed to raise just $2.5 billion in capital globally, indicating investor interest in other debt strategies and low deployment of existing capital, according to a report by alternative asset data tracker Preqin.

While the first five months of 2019 have seen just four distressed debt funds close, raising $2.5 billion, 2018 as a whole saw 25 funds secure $23 billion, the report said. Distressed debt fundraising reached a peak of $45 billion in 2008—a record that has not been equalled.

According to a Preqin’s survey of institutional investors, the largest proportion of investors believe the best opportunities are in direct lending (44%) and special situations (43%) funds, while distressed debt was the third most sought-after, with 36% of investors targeting it.

“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," said Tom Carr, head of private debt.

However, Carr added that the lack of interest in debt funds could simply be a case of capital build-up. “While the unrealized value of assets held by distressed funds has grown by 19% since 2013, dry powder has ballooned by 82%. Investors may be waiting for managers to put some of their $87 billion in dry powder to work before committing further capital," he added.

While distressed debt assets under management have grown from $165 billion to $226 billion between December 2013 and June 2018, this has been weighted toward dry powder, Preqin said. Available capital has grown by 82% in this period, the report added.

Another reason for low fundraising activity in distressed debt, Preqin added, is that the asset class performance has lagged behind other major private debt strategies.

Mezzanine funds and direct lending vehicles gained 16.1% and 6.6%, respectively between January 2018 and September 2018, while distressed debt funds lost 1.14% on average in the same period, the report said.

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