Private equity and hedge fund managers could raise $15 billion this year for distressed debt vehicles in anticipation of a new round of junk bond defaults.
These general partners are finding a ready supply of institutional investors committing hundreds of millions in anticipation that a portion of the abundant supply of low-grade debt issued for leveraged buyout firms will soon fail.
Some buyout and hedge funds new to the strategy are raising distressed funds in expectation that a hike in interest rates or an economic downturn could cause the buyout deals and refinancings bolstered by lower quality debt to tumble.
Most top distressed debt firms are raising substantially larger funds than the last time they were in the market. Private equity managers are expected to raise between $10 billion and $15 billion in distressed debt funds this year, compared to $6 billion in funds closed in 2005.
Some of the large commitments made by institutional investors to private equity funds have been to distressed debt funds. For example, last month the $40.2 billion Massachusetts Pension Reserves Investment Management Board, Boston, committed $100 million to Wayzata Opportunities Fund, a $1.25 billion distressed debt fund.
Distressed opportunities can come from leveraged buyout firms that are buying and retaining portfolio companies with debt, failing industries such as the airlines and automotive industries, and bankruptcies declared by companies in countries losing business to emerging countries like China.