Record Number of Distressed Funds Rush to Raise Cash in Downturn

(Bloomberg) -- A record number of distressed debt funds are seeking to raise fresh capital as the coronavirus pandemic sparks dislocation in the credit markets.

Seventy funds that focus on troubled companies are looking to bring in a combined $72 billion of capital amid a possible prolonged downturn, according to London-based research firm Preqin. That’s more than double the capital targeted by distressed debt funds during 2019, and is higher than any point since 2016.

Private credit firms have been building up distressed debt funds for years in preparation for a downturn. As of this month, they’re waiting to deploy some $68 billion of dry powder. That’s compared with $41 billion in December 2014, according to Preqin. The number is likely to drop as defaults pick up and investors find more ways to deploy capital, Preqin says.

Record Number of Distressed Funds Rush to Raise Cash in Downturn

The pandemic has paved the way for a wave of distressed assets that could generate attractive returns, UBS Global Wealth Management strategists Karim Cherif and Jay Lee said in a recent report.

“The credit market dislocation following the Covid-19 outbreak is likely to be a generational event,” the strategists wrote.

The pair predict that investing opportunities will come in three waves: first, the weakest businesses will liquidate after being unable to withstand the shock, second, companies will hunt for liquidity after drawing revolvers, and finally, borrowers will look to restructure their balance sheets.

Record Number of Distressed Funds Rush to Raise Cash in Downturn

Stay-at-home mandates and business closures enacted to combat Covid-19’s spread brought the world’s economy to a near-standstill, sent stocks plunging and froze credit markets. While unprecedented government support has helped stem the bleeding, few market watchers now expect a quick recovery. A period of prolonged pain should help credit funds that specialize in distress thrive.

Firms including HPS Investment Partners, Brigade Capital Management and Bain Capital Credit have already put money to work in distressed strategies, Bloomberg previously reported.

Several firms that specialize in distressed investing announced new funds after the pandemic sparked a global sell-off in the credit and equity markets. Oaktree Capital Management is building one of the largest distressed debt funds in history, targeting $15 billion in assets.

Other household names in the private debt space including Apollo Global Management Inc., Goldman Sachs Group Inc. and Carlyle Group Inc. are also in the mix with new funds targeting distressed securities. About three-quarters of the capital firms are seeking is earmarked for troubled North American companies, while 20% is designated for struggling European firms, Preqin found.

©2020 Bloomberg L.P.

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