Private equity investment managers especially those with hot, specialized strategies were big winners in 2007.
Assets of private equity managers in Pensions & Investments annual survey of the largest money managers grew 89% to $70.38 billion as of Dec. 31, besting the 63% growth in 2006.
Assets in specialized areas such as distressed debt, energy and infrastructure skyrocketed in 2007. Distressed debt rose a whopping 68% to $9.8 billion; infrastructure investment rose 205% to $1.9 billion and energy grew 43% to $3.6 billion.
While P&Is samples in these specialized areas are small, consultants and managers say the numbers accurately reflect 2007 investment trends.
(Readers should note that the private equity numbers are skewed because this is the first year Lehman Brothers Holdings Inc., New York, reported its private equity assets. Those assets, at $23.2 billion, account for roughly one-third of the total private equity reported. When Lehmans assets are excluded, private equity rose 27%.)
Distressed managers last year squirreled away capital in preparation for a market upset, said Tom Bernhardt, director of research at PCG Asset Management LLC, La Jolla, Calif. The last few years were not kind to distressed debt investors because there were few opportunities, he said. But investors had been anticipating a change and raised funds.
Distressed investors have been positioning funds to take advantage of the blowup for over a year, Mr. Bernhardt said. Many expected it to happen sooner than it has.
Still, there are not a lot of truly distressed companies available, Mr. Bernhardt said, adding: There needs to be more companies feeling financial pressure before distressed investors will generate meaningful returns.
A number of firms also raised distressed debt funds to take advantage of the leveraged buyout and real estate loan debt clogging bank balance sheets.
For example, Oaktree Capital Management LP, Los Angeles, which again topped P&Is list of distressed debt investment firms with $8.1 billion, quietly closed the $4 billion Oaktree Loan Fund in October. The fund bought debt that banks were having trouble selling to other investors. (Oaktree raised additional capital during 2007 by being one of the first private firms to list on a private exchange run by Goldman Sachs Group Inc.)
Los Angeles-based TCW Group did not raise a distressed debt fund last year. Its distressed debt assets dropped to $504 million in assets from $877 million.
The distressed environment in 2007 was one of wishful thinking, said Robert Beyer, TCWs chief executive officer. TCW raised its first special situations fund to invest in distressed corporations in 1990, he said. It appears that highly leveraged companies will suffer as the economys strains start to ripple through multiple industry sectors.