Good deals in pandemic-hit companies are proving hard to find. Here’s how big investors that raised billions to pounce on corporate distress are changing up their playbooks.

A woman walks into a closing Gordmans store, Thursday, May 28, 2020, in St. Charles, Mo. Stage Stores, which owns Gordmans, is closing all its stores and has filed for Chapter 11 bankruptcy. (AP Photo/Jeff Roberson)

Summary List Placement

Investment firms that raised billions to help finance companies reeling from the coronavirus pandemic may have to wait until 2021 or beyond to deploy that capital. 

Wall Street experts that deal with distressed companies have changed their outlook from earlier on in the pandemic. Instead of a quick rush of bankruptcies and defaults, they’re now expecting the economic pain will take longer to unfold but could ultimately burn deeper and wider given the additional debt corporations have taken on. 

When COVID-19 first wreaked havoc on the economy this March, PE giants like Ares, KKR and Oaktree raised funds to lend to companies ranging from large, established brands facing short-term liquidity issues to businesses on the brink of bankruptcy.

Those fund launches helped push private credit to record levels this year. In aggregate, private debt funds were targeting $295 billion in capital through the third quarter — up 54% from the start of the year — across 521 funds, both all-time highs, according to a report from Preqin. Direct lending remains the most popular strategy, accounting for half the targeted capital, but interest in distressed and special situations grew substantially, and more than $100 billion is targeted toward those strategies.

But much of the private-credit growth in 2020 occurred in the second quarter, when investors still expected an imminent, significant wave of defaults. Of the $38 billion raised across 60 private credit funds in Q2, at least $22 billion went toward special situations and distressed-focused funds, according to Preqin.

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In the third quarter, private debt fell back to earth and funds struggled to close, Preqin said. Only 20 funds closed with an aggregate of $8.4 billion raised, down nearly 80% percent from Q2, with $2 billion going toward special situations and distressed-focused funds.

Bankers and other PE insiders say several factors have made private lending less bountiful than originally expected. The early dark days of the pandemic passed within weeks as the Federal Reserve took action to stimulate the economy and spur liquidity. The economy has been damaged, but funding has been readily accessible, interest rates remain low, and markets have steadily rebounded.

Many companies have thus averted crisis for now. The wave of expected bankruptcies and defaults outside of sectors such as energy, retail and hospitality — some of which were already under pressure pre-pandemic — have been relatively slow to materialize.

“The central banks are indirectly injecting a lot of liquidity to sub-investment grade businesses that need it,” said Jeffrey Griffiths, a placement agent at Campbell Lutyens, who is raising funds for private credit firms to loan to middle-market companies.

Griffiths said that companies with $2 billion enterprise value and above are not having a problem accessing the publicly leveraged credit capital markets, such as leveraged loans and high yield bonds. But he said that smaller companies need to access private markets. 

“Banks are increasingly unable and unwilling to provide special-situations capital to businesses that are in need of extra help,” said Griffiths.

As banks retreat, the middle market is ripe with opportunities

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Source:: Businessinsider – Finance

      

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