Commitments to distressed private equity funds fell by 16 percent last year, according to Bain & Company’s 2014 global private equity report.
Bain attributed the decline to a general improvement in the global economic outlook, which tends to correspond with a similar decline in corporate default rates.
“New capital flowing to funds that focus on distressed companies, which do well when the economy is struggling, was down in 2013, following several years of growth,” according to the report. In contrast, commitments to buyout, infrastructure, natural resources and real estate funds increased last year.
The report defines distressed private equity as distressed debt, special situations, and turnaround funds. Perhaps unsurprisingly, dry powder for distressed funds also fell by 2 percent over the year.
Although distressed fundraising fell out of favour last year, a number of firms specialising in special situations and turnaround situations managed to hold marquee closes last year. Kohlberg Kravis Roberts closed its debut special situations fund on $2 billion during the fourth quarter and The Blackstone Group’s credit arm GSO Capital Partners closed its rescue lending fund on $5 billion.
Some those firms’ fundraising success can likely be attributed to performance. Distressed funds generated an 18 percent return in 2013, the best one-year internal rate of return among the strategies tracked by the study, according to Cambridge Associates figures cited by Bain.