Not Everyone Sees Opportunity in Distressed Debt Mega-Funds

Some are skeptical that the opportunity set is as big as money managers say.

Angus Mordant/Bloomberg

Angus Mordant/Bloomberg

Amid the coronavirus pandemic and subsequent market downturn, private credit firms looking to capitalize have started to raise massive distressed debt funds.

Big names like Apollo Global Management, and, per Bloomberg, Carlyle Group and Oaktree Capital are among those raising billion-dollar funds. And major allocators like the Washington State Investment Board have said they’re considering distressed debt investments during this time.

But some are skeptical that the opportunity set is really as large — or as valuable — as money managers say.

“This is probably the story of the dog that didn’t bark,” said Michael Rosen, chief investment officer at Angeles Investment Advisors. “I’m not finding anything compelling with these mega fundraises for the coming collapse of the corporate credit market.”

Rosen likened it to the period following the 2008 financial crisis, when investment firms speculated that banks, which were holding nonperforming loans, would be forced to mark those loans to market value. If they did, investment managers believed, the banks would be forced to sell said loans, presenting a massive credit investment opportunity.

This didn’t bear out: the government bailed out most of the banks.


“All of that logic was valid, except that it never really came to pass in any degree of magnitude,” Rosen said by phone. “There were pockets of banks looking to unload some assets, but it was not a systemic asset dump that a lot of the money managers were hoping for.”

Rosen believes something similar is taking place today, pointing to central banks buying up private debt and policymakers passing aid packages like the CARES Act, or the Coronavirus Aid, Relief, and Economic Security Act.

Similarly, Jason Dillow of Bardin Hill Investment Partners said he thinks that if there are opportunities, they won’t be where many credit managers are looking.

According to Dillow, most managers involved in these massive private credit fundraises are looking to get into triple B-rated bonds — these are the lowest rated bonds in the investment-grade segment, meaning they are most vulnerable to being downgraded to junk. While there is, of course, some opportunity there, the segment is getting saturated, he said.

“There has been a lot of discussion around the size and scope of capital being put to work on the triple-B side,” Dillow said by phone Monday. “Everyone is looking for the big fallen angel opportunity.”

He added that in the past year, there have been more than $150 billion of those so-called “fallen angels” in the United States — the highest ever on a full-year basis.

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According to Dillow, there still simply won’t be enough to go around. Instead, his firm is focusing down-market. He said Bardin Hill is looking at buying $2 million to $7 million pieces of debt at a time, which can be aggregated into a $50 million to $100 million or greater position. Rosen noted that his firm is looking at these smaller, niche-like debt investments.

“There will be opportunities and defaults,” Rosen said. “But a systemic collapse that provides trillions in opportunities? I don’t see it.”