Funds Eye Distressed Plays
The financial markets may be reeling, but distressed investors see opportunity amid the turmoil. Distressed firms are seeing strong interest from investors with 18 funds raising $37.9 billion thus far this year, up 28% percent from $29.5 billion raised by 16 funds at this point last year, according to a recent report from Dow Jones Private Equity Analyst. Moreover, a recent Bracewell & Giuliani, Debtwire survey, which polled 100 fund managers, prop and trading desks, predicts distressed deals will increase. “While the outside world can sometimes perceive distressed debt investors as pure play vultures, these folks will play a pivotal and critical role rebuilding the economic security of our country,” said Evan Flaschen, Head of Bracewell’s Financial Restructuring Group.
A rising number of investors, hoping to capitalize on the meltdown, are ready to put up some cash. They are called “vulture investors” or “distressed funds” – and they are growing in number. These investors aim to snap up teetering assets such as real estate and mortgage-backed securities on the cheap, then cash in when prices recover. Amid the trend, executive search firm, A.E. Feldman, says that opportunities exists for investment professionals who specialize in researching distressed securities and who understand the true risks and values involved. The firm says candidates with strong valuation, modeling, and analytical skills are poised to gain from this trend. The firm also notes that legal jobs are opening up as law firms staff up subprime teams in an attempt to address the needs of clients facing a liquidity crisis or those searching for value opportunities.
Distressed investors look to buy the discounted bonds, loans or other debt of firms that have defaulted as well as those that are on the verge of bankruptcy or financial restructuring. These investors are making a bet they can ride out the slide and enjoy strong returns after a turnaround. Those eyeing distressed assets include wealthy individuals, pension funds, hedge funds, endowments. A number of firms are also launching distressed debt funds.
An overwhelming 91% of respondents surveyed by Debtwire for Bracewell & Giuliani believe there are even more write-downs coming from elite banks, but respondents suggest there is a silver lining in the midst of the spiraling economic crisis. More than half of respondents predict that distressed debt supply will outstrip demand in the upcoming year as battered investors assess their risk appetite. As a direct result, the majority of respondents expect distressed debt to become even cheaper than current levels, creating even more of a buyers market. Moreover, 45% of respondents believe that CLOs and other CDOs will make a comeback at some point in the future. Half of those polled also expect to see an increase in the number of busted or renegotiated private equity financings.
Funds Eye Distressed Plays
Oaktree Capital Management set a record for largest individual distressed fund by raising $10.6 billion for OCM Opportunities Fund VII LP earlier this year. The $3.8 billion Kresge Foundation may also increase its exposure to distressed securities over the next year because it expects buying opportunities to present themselves, according to Foundation & Endowment. The report states that the foundation has a 3.5% allocation to distressed corporate bonds via private equity funds but could increase that to 15% if opportunities arise, quoting Edward Hunia, SVP of Investments. Hunia adds that if the foundation does move in that direction, it would likely seek new managers and add to incumbents.
Hedge fund firm, GAM, is preparing to launch a distressed debt fund of funds after watching asset prices reach “extreme levels,” according to Hedge World, citing a company letter seen by Reuters. According to the report, the letter, which was dated Oct. 2nd, stated GAM clients had been requesting a distressed fund for more than a year.
Investcorp launched a $1 billion fund to take advantage of turmoil in U.S. credit markets by buying real estate-related debt, according to Reuters. BNP Paribas has created a new distressed finance group, reports Dow Jones. The firm has established a new specialist finance team within its fixed-income division to seek out opportunities in distressed debt trading, rescue financing and turnaround investing as a result of the credit market dislocation and souring economic outlook. Giant U.S. bond fund manager, Pimco, is also targeting $5 billion of distressed mortgage securities, says Dow Jones.
A.E. Feldman’s finance division is on top of the latest developments in the financial markets and is constantly researching industry and economic trends. The recruiting firm invites firms to contact its President, Mitch Feldman, its CEO, Carol Schwam, and its highly specialized team of executive recruiters directly to open up a dialogue about the array of issues they face and those they anticipate in the future. The firm also encourages candidates to inquire about existing and future job opportunities. According to Mitch Feldman, “Our lines of communication are open.” Contact Mitch Feldman, and the firm’s expert recruiting teams here.
