Distressed deals on the up, despite valuation issues

There is almost a universal consensus: in the face of the havoc covid-19 is wreaking on economies worldwide, 92 percent of private equity fund managers expect to see an increase in the volume of distressed deal activity over the next year.

The finding comes from a survey conducted by Intertrust, the fund and corporate solutions firm, which interviewed 150 private equity fund managers in Europe, North America and Asia to identify risks and opportunities arising from the pandemic.

However, almost half of respondents (46 percent) believe that mismatches in valuation expectations between buyers and sellers mean the level of dealflow could be lower than it would otherwise have been.

Distressed strategies are also likely to benefit from an improved fundraising climate, which for most other fund types is expected to worsen. Some 83 percent of respondents expect the fundraising climate for distressed funds to improve over the next 12 months, with 42 percent saying it will improve significantly.

“Distressed funds specialising in debt, turnarounds and special situations are likely to be the biggest near-term beneficiaries as falling valuations present highly attractive buying opportunities for GPs with large amounts of capital to deploy,” said Chitra Baskar, global head of funds at Intertrust.

The study reveals a growing interest in the role that private debt can play during and after the crisis. Almost a third (31 percent) of private equity investors say they are planning to diversify into direct lending strategies over the next year.

Despite the volume of dry powder in the market, the prevailing sentiment is caution. Nearly three quarters (73 percent) of investors expect private equity firms to be driven by the need to stabilise the financial health of portfolio companies. More than half (54 percent) believe GPs will be “in defence mode” until the impact of the virus is fully understood.

The most common measures in response to covid-19 are fund term extensions. Three-quarters of survey respondents expect to see the introduction of extensions for funds nearing the end of their terms to allow more time for deployment.