Recent weeks have seen a flurry of closings for funds that pursue distressed strategies with the noticeable absence of that word. Instead, they’re called such things as credit solutions, opportunities or special situations funds.
Even Oaktree, with one of the biggest distressed debt portfolios, took the unusual step of removing the word distressed from the name of its gargantuan $15.9 billion Opportunities fund – the largest private debt fund ever according to PDI data – when it closed the fund last autumn.
At the time, Oaktree said it was making the change to “better reflect how its investment style has evolved and expanded over three decades”. In its monthly Insights piece last November, it noted that “as the definition of corporate distress has evolved, so too has our investing approach”. The firm said that “key factors affecting the credit cycle” had changed since the platform was founded in 1988, which lowered the cost of debt and made the default environment “more benign”.
Oaktree declined to comment. But as the Insight piece explained, the US Federal Reserve’s “ultra-accommodative monetary policy played a major role in limiting default activity”, both in the aftermath of the global financial crisis in 2008 and the capital markets’ disruption precipitated by the pandemic in 2020. So successful was the Fed’s intervention that fund managers, which in short order raised substantial amounts of money in the spring of 2020 anticipating a wave of bankruptcies, barely had time to blink before the opportunities had disappeared.
Indeed, bankruptcies overall have fallen to record lows in the past year. But the move away from “classic” distressed seems to have occurred well before the Fed flooded the system with money to stave off a liquidity crisis in 2020. According to PDI data, distressed debt accounted for just 15 percent of all fundraising in 2018, half the share of the previous year.
“The reality is that… ‘distressed’ was never really only just distressed; historically it’s also included stressed and special situations,” says Jason Dillow, chief executive and chief investment officer of Bardin Hill Investment Partners. He attributes the impetus for avoiding the name partly to the muted returns for the strategy between 2010-19. Although he says part of the move away from the name has to do with rebranding, “investors have had to add a lot more arrows to their quiver” because there has been so little classic distressed.
Nonetheless, it would be wrong to call time on distressed investing any time soon. “History has taught us that the corporate distressed business is incredibly episodic,” says John Kline, co-head of private credit at New Mountain Capital. That can make fundraising difficult. “If you’re not making a pinpoint call on the distressed cycle, you need to have a flexible mandate to pivot to where the opportunities are.”
Notably, there was at least one high-profile rescue financing in the corporate public market this spring. Perhaps that indicates another distressed episode is on the horizon. But do you call it that or not?
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