Report identifies seven strategies boosting fundraising

New research from London-based consultancy bfinance – in a paper called “Dislocation and Distress: Navigating New Opportunities” – found more than 130 launched and “soon to be launched” funds targeting opportunities arising from covid-19 dislocation.

The paper suggests this year may turn out much better on the fundraising front than anticipated, in spite of a slow start to the year. Private debt fundraising globally reached just over $20 billion in the first quarter, well down on the quarterly average seen since the last crisis.

Of the funds that bfinance analysed in April and this month, it found seven distinct sub-strategies:

1. Dislocated entry – private credit: Funds trying to gain entry into private credit investments at low prices, relying on passive recovery or, more likely, restructuring initiatives to generate value. These strategies target distressed borrowers and stressed investors under pressure to sell.

2. Dislocated entry – real assets: Funds focused on acquiring real assets (property, infrastructure, development land, aircraft, ships, etc) or the debt secured on those assets at a discount to ‘true’ value. These assets will be stressed or have problems in financing structures, and positions will be acquired from sellers no longer wanting to hold.

3. Dislocated entry – public markets: Funds targeting the purchase of normally liquid credit instruments at a significant discount, equating to a higher expected yield. Investment choices range across investment-grade credit, high-yield bonds, broadly-syndicated bank loans and CLO tranches.

4. Evergreen opportunities: Open-ended funds focusing on a broad opportunity set across stressed and distressed investing, restructurings, rescue lending and non-performing loans.

5. Financing solutions: Funds aiming to facilitate the survival of “struggling-yet-viable” companies by providing bespoke financing solutions. Target companies are typically mid-market and can’t access their traditional financing sources.

6. Fund financing and secondaries: Funds which buy stakes in funds or portfolios of investments from funds and hold them to realisation at maturity; and fund financing for GPs required to provide liquidity to investors or support portfolio companies needing capital.

7. Multi-strategy: Funds targeting some combination of the above six strategies to provide a single point of entry into a diversified portfolio taking advantage of distress and/or dislocation.

The report noted that there are big differences between individual managers and between the fee structures being used, and that investors needed to be extremely careful to ensure alignment of interest. Average base fees for the strategies ranged between 100 and 150 basis points, with median expected returns typically between 13-15 percent.

Trevor Castledine, senior director of private markets at bfinance and the lead author of the report, said the strategies “could be a very rewarding opportunity set; but where risks can be high and selection of a suitable strategy and an investment partner to deliver it, is key”.