Private Equity Managers Eying Distressed Funds, Private Debt

Nearly all private equity managers expect to see a surge in distressed fund deals over the coming year, according to a new survey.

The poll, commissioned by fund service firm Intertrust Group, found that 92 percent of private equity professionals across North America, Europe, and Asia believe distressed fund activity will increase in the wake of the coronavirus pandemic, which devastated businesses in the U.S. and elsewhere. Likewise, private equity managers viewed distressed funds as the biggest fundraising opportunity in the near future, with 83 percent indicating there would be more investor demand for strategies targeting distressed assets.

This sentiment is already being borne out at major private equity firms. Last month, Apollo Global and KKR & Co. said they raised $1.75 billion and $4 billion, respectively, for credit funds focused on “dislocation” resulting from the Covid-19 crisis. Both funds were raised in just 8 weeks.

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Some respondents to the Intertrust survey also saw existing private equity funds shifting assets to target distressed opportunities. According to the report, 41 percent believed managers would reallocate unfunded commitments to “new distressed or non-traditional strategies.”

“Distressed-led activity is set to be a defining theme for the year, with the existing high levels of dry powder in the market expected to act as a catalyst for high-profile market transactions,” James Ferguson, head of Americas at Intertrust, said in a statement.  

Other fundraising opportunities cited by survey respondents included specialist, sector-specific strategies — such as funds targeting healthcare or technology — and debt funds.

In fact, 31 percent of respondents said they planned to diversify into private debt funds over the next two years. This was the most popular answer among firms that planned to expand their offerings, followed by growth equity (21 percent) and buyout funds (20 percent).

Overall, however, 57 percent of survey respondents believed private equity opportunities would “deteriorate” over the next 12 months. Even though 79 percent said that the lower valuations resulting from the pandemic made for better buying opportunities, just under half believed that deal flow would be slowed down by the mismatched expectations of buyers and sellers. 

Fifty-four percent said private equity firms would likely operate in “defense mode” until the impact of Covid-19 is “fully understood,” while 73 percent said general partners would focus on stabilizing their portfolio companies.