More on credit opportunity funds
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"Everyone’s raising a lot of money, and by the time that money’s in place, is the opportunity going to be there?"
Richard Munn, Oak Hill Advisors |
Thanks to the kind of lending practices that precipitated this summer’s credit crunch, many managers in the credit markets have long seen distressed debt as the next big thing. As long ago as 2005, firms such as Intermediate Capital Managers, Blue Bay Asset Management and Babson Capital were establishing credit opportunity funds to take advantage of stressed and distressed assets should the market turn. Now that it has, their ranks have been joined by a surge of new entrants with the same strategy in mind. But those now looking to set up such funds will be joining a very crowded marketplace.
Perhaps as a reflection of the terms on which their own deals were being underwritten, many private equity sponsors themselves set up credit opportunity and distressed debt funds some time ago. Kohlberg Kravis Roberts’s $1 billion Strategic Capital Fund, Blackstone’s $500 million distressed debt fund and Carlyle Group’s $1 billion distressed debt fund were all established in 2006, when distressed bonds constituted less than 5% of the junk bond market. Carlyle’s credit opportunity fund, Carlyle Credit Partners, operates in the US and Europe and its loan opportunity fund was launched as long ago as 2003.
"The thinking behind launching a credit opportunity fund a year ago would have been that the credit cycle would turn and then you would have plenty of opportunity," says a fund manager with a credit opportunities fund. "There’s an incredible herd behaviour in the market and when paper starts underperforming, managers dump it. Right now you can pick up paper if bad news comes out on a credit and people panic."
It is the prospect of just such an opportunity that is luring the newer players. London-based Park Square Capital launched Europe’s largest credit opportunity fund by equity commitments in May this year and others, such as Indicus Advisors and Prytania Group, have also entered the market. "The timing has been quite good," says Malcolm Perry, CEO at London-based Prytania. "The opportunities out there are even better than before. A lot of people have headed for the hills – although some clients are recommending structured credit to their investment committees, particularly those that were underweight prior to and during the current crisis. In September or October the market should get moving. We’re hoping to be live with our new opportunities fund by then." Prytania has commitments of $100 million so far but it will be late October before the fund is able to invest.
The risk that the newcomers run is that the entrenched players have sufficient competitive advantage to limit their access to assets – something that has clearly been the case in the CLO market. "If you launch a credit opportunity fund now, yes, you will have some opportunities for the six to nine months with credits that just haven’t cleared. But what do you do a year down the line?" says the fund manager. "It sounds like a good idea on paper, but you need workout and restructuring experience to run these funds." Richard Munn, co-head of Oak Hill Advisors’ London-based business (another long-standing player) agrees. "Everyone’s raising a lot of money, and by the time that money’s in place, is the opportunity going to be there?" he asks. "There’s so much potential money coming in that could kill the golden goose. When suddenly [banks] find the demand for assets is there, the prices won’t be what everyone is looking for."