Preqin: Dry Powder at Distressed Debt Funds Hit Record in 2015

Feb 16 2016 | 11:50pm ET

Distressed debt funds in North American and Europe are sitting on record levels of capital available for investments, according to a new report from industry data provider Preqin. 

Dry powder in distressed debt funds reached a record $54.7 billion last year before dipping slightly to $52.9 billion last month, according to the report – more than 30% higher than in 2007 and 2008. Moreover, although annual fundraising for distressed debt funds has been rising steadily since hitting a low of $8 billion in 2009, it has yet to recover to pre-economic crisis levels – $23.3 billion was raised in 2015, only 53% of the 2008 record.

The reason for the disparity, Preqin writes in the report, has to do with the rate at which managers have put capital to work. The company estimates some 43% of current dry powder is held by funds of vintage 2012 or older, as capital has been called at what Preqin characterizes as a “more leisurely pace” in recent years. Accordingly, pressure is rising to put this capital to work within the five-year investment period employed by most distressed debt funds.

Moreover, distressed debt dry powder focused on North America and Europe accounts for a significant proportion of overall private debt dry powder at 30%, according to Preqin. Not surprisingly, almost 95% of dry powder held in distressed debt funds is focused on either North American or European investment.

The five largest dry powder arsenals among North America- and Europe-focused distressed debt funds raised in the 10 years ended Dec. 31 are:

  • Fortress Investment Group, an estimated $6.8 billion out of $15.8 billion 
  • GSO Capital Partners, an estimated $4.9 billion out of $19.4 billion 
  • Centerbridge Capital Partners, and estimated $4.7 billion out of $17.6 billion 
  • Sankaty Advisors, an estimated $3.6 billion out of $13.2 billion
  • Oaktree Capital Management, an estimated $3.6 billion out of $55.6 billion

Other key findings from the report:

  • 77% of North America-focused distressed debt funds in market are targeting the majority of total capital sought by the strategy.
  • 30 distressed debt funds were on the road as of the end of January 2016
  • The average target size of distressed debt funds currently on the road is $1.5 billion, notably higher than other private debt strategies.
  • The average distressed debt fund needed 15 months to reach a final close in 2015.
  • There are currently 114 institutional investors with active mandates for distressed debt funds
  • Seven of the ten largest North America-focused private debt funds in the market employ a distressed debt strategy, compared with three of the ten largest Europe-focused funds.

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