Distressed Private Equity Sees Upswing

Terry Flanagan

Since the financial crisis, distressed private equity has become an increasingly popular investment strategy, with institutional investors looking to gain exposure to companies in financial distress as a result of the difficult economic climate.

“Due to bank consolidations and the general business clients, we are seeing a void where both distressed and healthy companies aren’t able to get the credit that they were used to getting five years ago,” said Brendan Carroll, partner and co-founder of alternative asset management firm Victory Park Capital. “There’s a saying, ‘big banks don’t want to lend to smaller companies, and smaller banks don’t want to lend to anybody’. That’s as true today as it’s ever been. Local regional banks are no longer looking to lend to local businesses; instead they’re looking up market for safer credits.”

There are currently 68 distressed private equity funds on the road seeking an aggregate $49.2 billion in capital commitments, a category that includes distressed debt, special situations and turnaround strategies, according to research firm Preqin.

“Since the onset of the financial crisis, LP’s [limited partner’s] appetite for distressed private equity has significantly increased,” said Preqin analyst Lisa Gan in a blog posting. “This has been driven by the increased distressed private equity investment opportunities due to the contraction of debt being offered through more traditional sources, and companies experiencing significant financial difficulties. Alongside this, there has been strong historical performance of distressed private equity funds in the last decade concerning median IRR [internal rate of return] figures.”

Working primarily with U.S.-based companies across a variety of industries, Victory Park Capital typically seeks to invest between $10 million and $50 million per transaction.

The firm works primarily with small-cap public companies and middle-market private companies that typically generate less than $150 million in revenue and $30 million of ebitda [earnings before interest taxes and depreciation].

“Victory Park Capital is a bit of a hybrid in that we focus on private direct lending as well as private equity,” said Carroll. “We lend to the lower-middle market, where our entry point is low enough that we are off the radar screens of the Blackstones and the Cerberuses.”

Victory Park Capital’s investment approach is multi-faceted. “We are a lender from healthy to distressed companies, and we also operate like traditional private equity firms, whether we will provide debt capital as well as bring in outside management to own and operate the business,” said Carroll. “We are a lender to distresses situations that can’t attract traditional debt capital. We lend for periods of up to four years in the hope that the company will complete its restructuring.”

Sometimes, a relationship will “start out as a loan, but an occurrence at the company will cause us to become more involved in management than we had initially thought”, he said. “Our goals are to be a lender and to generate yield for our investors.”

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