Centerbridge ’12 distressed fund’s IRR unlikely to match predecessor

Centerbridge Partners’ 2012 distressed-debt vehicle is unlikely to generate the lofty internal rate of return netted by its predecessor, a 2009 vintage fund deployed near the height of the financial crisis.

The firm marked down much of Centerbridge Special Credit Partners II’s portfolio last year, said Centerbridge co-founder Jeffrey Aronson in an audio recording of Oregon Investment Council’s April 20 meeting.

Centerbridge Special Credit Partners II, which raised $2 billion in 2012, was netting a 1.36 percent internal rate of return and 1.03x multiple through Sept. 30, according to Montana Board of Investments documents.

Its predecessor, also a $2 billion vehicle, was netting a 12.36 percent IRR and a 1.51x multiple as of the same date.

Centerbridge invested Fund II between mid-2012 and mid-2015. Last year, the S&P U.S. Distressed High Yield Corporate Bond index slipped by roughly 30 percent. While the firm is “confident” that Fund II will still generate a “reasonable multiple” on its invested capital, its IRR is unlikely to “match its long-term track record,” Oregon staff wrote in a memo. 

“The likelihood that we’ve made a mistake in everything, it’s just not the case. Bear markets [and] bull markets end and, as a result, the timeline to achieve the underwritten returns is extended. But it comes with the strategy,” Aronson said in the recording.

Centerbridge declined to comment.

Debt-market cyclicality played a role in how the firm structured its third fund, Centerbridge Special Credit Partners III, which is being marketed with a $5 billion target and $6 billion hard cap, Aronson told Oregon.

Fund III will invest in non-control distressed debt in the senior loan and high yield bond markets. Buyouts first reported on the fundraise in March.

Centerbridge will split the fund across two vehicles, allocating 25 percent of each LP’s commitments to a main fund and the remainder to a “reserve fund,” according to Oregon documents. The firm will activate the main fund upon its final close. The remainder, representing 75 percent of the capital raised, will be held on a no-fee basis in the reserve fund until market opportunities present themselves.

Centerbridge can then activate the reserve fund at any point during the main fund’s three-year investment cycle. If it’s never activated, “limited partners will be released from that portion of their capital commitments,” Oregon staff wrote.

“We think the credit cycle is approaching one of those inflection points you see every seven years or so,” Aronson said, later adding, “We know we don’t know, so we’ve structured this fund with that in mind.”

The decision to hold committed capital in reserve bears some similarity to funds raised by Oaktree Capital Management. That firm is targeting $3 billion for its Opportunities Fund X and $7 billion for Fund Xb for investments in distressed debt. Fund Xb will be activated once Fund X is deployed.

Splitting a distressed fund across two vehicles is “a newer thing, but it’s been around for about a decade,” said one Oregon staffer on the recording, noting Oaktree’s success with the strategy. “It’s incredibly effective when done properly.”

Oregon committed as much as $500 million to Centerbridge Partners’ new debt fund. Depending on whether Centerbridge activates the flex fund, however, its actual allocation may top out at $125 million. The commitment remains subject to final negotiations and legal review.

Centerbridge manages some $25 billion of assets, according to Oregon documents. The firm has offices in New York and London.

Action Item: For more information on Centerbridge, visit www.centerbridge.com

Photo: Jeff Aronson, founder of Centerbridge Partners LP, speaks during the Wall Street Journal Deals and Dealmakers conference in New York on June 11, 2008.  Courtesy Reuters/Chip East