An optimal market for special opportunities funds

Two years ago, Buyouts did a story on special opportunities funds, an emerging niche area of particular interest to large, multi-product managers.

A dozen or so GPs offer the strategy, or something like it. While strategies vary, they are typically flexible and opportunistic in nature, providing bespoke, mostly non-control equity, debt and hybrid capital solutions to address unmet business demand. They are also all-weather, especially well-suited to periods of dislocation.

Of course, in their individual elements, there is nothing new here. What makes special opps unique is their combination of features in a single platform – one that looks to invest in assets, geographies, markets and sectors that go beyond a firm’s other funds.

A filling-in of missing pieces, if you will, and something of a search engine in a complex and evolving market full of white spaces.

In the 2021 Buyouts story, Brian Gildea, then Hamilton Lane’s head of investments, put it well.

“These strategies fill a gap for GPs because they capture dealflow that has no other natural home,” he said. “Rather than ceding an opportunity to someone else, the manager now has a pool of capital to make the investment. This gives GPs another way to differentiate themselves from competitors.”

“For LPs like us, they also fill a gap,” Gildea said.

In recent years, special opps funds have raised billions of dollars. Some GPs are already on their second, third – and in the case of Blackstone, fourth – vintages. And several are – or will soon be – back in the market.

For example, Ares Management, which closed a second fund in 2022 at $7.1 billion, will launch Fund III over the next few quarters, CEO Michael Arougheti said in August. It will presumably aim to raise as much or more than its predecessor.

And Brookfield Asset Management, which closed a debut vehicle last year at $2.1 billion, and upwards of $1 billion in side-car capital, is now seeking as much as $3.5 billion for Fund II, Private Equity International reported.

There is also Blackstone, whose $34 billion Tactical Opportunities helped inaugurate special opps as a niche investment category. It closed Fund IV in August at $5.2 billion and is now finalizing fundraising for parallel vehicles, which are expected to bring the vintage’s total investable capital to nearly $10 billion.

This capital raising is well timed, as dislocation-focused managers of special opps funds eye an environment roiled by uncertainty, inflationary pressures and rising interest rates.

This week, Buyouts did an exclusive interview with Tac Opps global head David Blitzer and COO Chris James about the current opportunity set. Due to “the fastest and highest rate rise in history,” Blitzer said, “the market is just starting to get more interesting.”

“I think we have yet to see a lot of the effects in the real economy of rate rises,” he said. “But we expect to see a ton of companies needing to refinance their balance sheets but that can’t refinance them in today’s environment at the debt levels they’re at.”

Businesses that refinanced when rates were low, and now have capital structures that are about to come due, will need equity, Blitzer said. “I think in most cases they’re going to be looking for structured equity” – a type of hybrid financing offered by Tac Opps.

In other words, the market appears optimal for special opps funds. During the last dislocation in pandemic-rocked 2020, Tac Opps invested a record $4.8 billion. It and similar platforms may be about to set new deployment records in the months ahead.