Dry powder for debt funds hits all-time high

In the three months ended June 30, sponsors closed 25 private debt funds with a total of $16.5 billion in capital commitments, down from 26 funds that raised $20.8 billion in the first quarter, according to a new study by Preqin. In the fourth quarter of 2014, 31 funds closed on $23 billion. In the second quarter of 2014, credit funds drew about $20 billion in commitments.

It’s unclear why total committed dollar volumes for credit funds continued to diminish in the second quarter, but an increase in dry powder overall could be a factor. In total, dry powder available to private debt fund managers rose to $179 billion, the highest level ever tracked by the firm. At the end of 2014, dry powder was less than $140 billion.

“With unspent capital now at record levels, investors may be hesitant about committing to new funds until they see existing investments deployed into viable opportunities,” Ryan Flanders, head of private debt products at Preqin, said in a prepared statement.

At $3 billion, Cargill’s CarVal Investors’s CVI Credit Value Fund III, a distressed debt fund, ranked as the largest debt fund to close in the second quarter, followed by Park Square Capital’s $2.4 billion direct lending fund, Park Square Capital Credit Opportunities III. Coming in at No. 3 was the $1.5 billion Ares Special Situations Fund IV, a special situations pool from Ares Management.

Direct lending funds drew 39 percent of the capital raised in the second quarter, followed by 32 percent for distressed debt funds, 12 percent for special situations and 10 percent for mezzanine funds.

Down for distressed

LP interest in distressed debt fund structures increased at the start of the third quarter, with 56 percent planning to invest in funds of that stripe, up from 30 percent in the second quarter. About 61 percent of LPs consider mezzanine a viable fund structure, up from 28 percent in the previous quarter.

“The credit space has seen nearly seven years without a downturn, which is the main catalyst for gathering of assets among strategic distressed managers,” Preqin said. “It was interesting to see how the global credit story develops in the wake of Greek debt issues affecting European and world economies.”

More private debt funds are currently in the market, and their combined dollar total suggests that GPs hope to draw a bountiful crop of capital in the balance of 2015.

As of July 1, 257 private debt funds were seeking $130 billion, compared to 237 funds seeking $122 billion at the start of the second quarter.

Oaktree tops list

Oaktree Opportunities Fund Xb from Oaktree Capital Management leads the list of private debt funds currently in the market, with a target of $7 billion. Tied for second with a target of $4 billion each are Fortress Credit Opportunities Fund IV from Fortress Investment Group and Mount Kellett Capital Partners III from Mount Kellett Capital Management.

The Oaktree and Fortress funds are both distressed debt, while the Mount Kellett fund will take aim at distressed situations.

Of the funds currently out on the road, 41 percent have been in the market for more than 18 months. That’s an increase of six percentage points from the previous quarter. Funds in market for less than six months accounted for 21 percent of the total in Q2, down from 29 percent in the first quarter.

Ranking of private debt funds closed in Q2
Fund	Firm	Fund focus	Size
CVI Credit Value Fund III	CarVal Investors	Distressed Debt	$3 bln
Park Square Capital Credit Opportunities II	Park Square Capital Partners	Direct Lending	$2.4 bln
Ares Special Situations Fund IV	Ares Management	Special Situations	$1.5 bln
KKR Lending Partners II	Kohlberg Kravis Roberts & Co	Direct Lending	$1.3 bln
Athyrium Opportunities Fund II	Athyrium Capital Management	Venture Debt	$1.2 bln
Monarch Alternative Capital Partners III	Monarch Alternative Capital	Distressed Debt	$1.2 bln
Brightwood Capital Fund III	Brightwood Capital Advisors	Direct Lending	$950 mln
York European Distressed Credit Fund II	York Capital Management	Distressed Debt	$534 mln
Shoreline China Value III	Shoreline Capital	Distressed Debt	$500 mln
Highbridge Principal Strategies Cactus Direct Lending Fund	Highbridge Principal Strategies	Direct Lending	$500 mln
Source: Preqin