Knighthead Capital Is Said to Plan $750 Million Drawdown Fund

(Bloomberg) -- Knighthead Capital Management, the $3 billion distressed-debt hedge fund firm, is planning on raising its first drawdown fund, according to people with knowledge of the matter.

The New York-based company, which was founded a decade ago by Ara Cohen and Tom Wagner, will begin fundraising in the second quarter of this year and is aiming to raise as much as $750 million, said the people, who asked not to be named because the matter is private. The Knighthead Distressed Opportunities Fund will focus on global stressed and distressed credits.

Low interest rates and steady economic growth over the last few years have stymied hedge funds that focus on investing in troubled borrowers. The lack of opportunities hasn’t stopped investors from gearing up in anticipation that a long overdue cyclical downturn is right around the corner. Drawdown funds -- which are more common at private-equity firms -- allow distressed-debt investors to raise committed capital they can later call and deploy once opportunities, like bankruptcies and other defaults, finally begin to appear.

The tally of corporate defaults around the world fell last year to 2.9 percent of junk issuers, and will decline further to 1.7 percent by the end of 2018, according to Moody’s Investors Service. As of December, U.S. distressed-debt managers had $65.2 billion to invest, compared with $41.2 billion of dry powder a decade earlier, according to research firm Preqin.

Knighthead has told investors that it expects a variety of distressed situations to crop up within the next three years, with trades that will be less liquid and require a longer period of time to realize value, said the people. Their pledged capital may be deployed within the next two years with a possible yearlong extension, and the assets then can be sold over two years with the possibility of two one-year extensions, said one of the people.

Fund Terms

Redwood Capital Management, Argentem Creek Partners, and Kennedy Lewis Investment Management are among the distressed-debt hedge fund firms that have raised fresh cash over the last year in a similar way. Paul Singer’s hedge fund Elliott Management, which counts distressed investing among its many strategies, raised $5 billion in committed capital last May in the firm’s biggest capital gathering ever.

“We can be patient and find unique opportunities that will present themselves as the cycle turns,” said David Chene, one of the founders of KLIM, which in November raised $250 million. “We can play offense at all times rather than worry about liquidity restrictions and find opportunities insulated from market technicals."

Knighthead’s new fund will only charge management fees on invested capital, and will levy performance charges after a minimum annual return level of 8 percent has been hit, said one of the people. The firm’s flagship fund gained 6.4 percent last year, and has made 9.3 percent on an annualized basis since its inception.

Laura Torrado, general counsel at the firm, declined to comment.

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