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LP Scorecard: Distressed debt lags other fund strategies for Washington State

By Rich Campanaro

Distressed debt can be a lucrative investment strategy, but Washington State Investment Board has had more success with several other substrategies within private equity.

Of nine substrategies tracked by the $116.5 billion pension fund (excluding real estate debt and co-investments), distressed-debt funds rank next to last in both investment multiple, at 1.4x, and net IRR, at 9.48 percent, as of year-end, according to calculations by the state.

All told, Washington State Investment Board has backed 25 distressed-debt funds spanning vintage years 1995 to 2015, including 15 funds managed by Oaktree Capital Management.

According to calculations by Buyouts, distressed-debt funds also produced a relatively compressed range of results for the state — from a bottom-quartile investment multiple of 1.3x to top-quartile of 1.60, and from a bottom-quartile net IRR of 5.31 percent to a top-quartile net IRR of 11.95 percent. For its calculations Buyouts removed 2013 vintage-funds and younger to avoid the J-curve effect.

Some of the state’s best performing distressed-debt funds, by net IRR, were OCM Opportunities Fund IV (28.02 percent), TPG Opportunities Partners II (17.97 percent), and OCM Opportunities Fund VII-B (16.62 percent), according to Buyouts’ analysis of year-end returns.

By comparison, the best performing private equity subcategory for the state by net IRR was megacorporate buyout funds (15.7 percent, according to the state’s figures), followed by midsized corporate buyout funds (13.56 percent), with small corporate buyout funds (11.57 percent) coming in third.

The best-performing category in the state by investment multiple was small corporate buyout funds (1.7x), followed by megacorporate buyout funds (1.6x) and venture capital (1.6x).

Firms managing distressed-debt funds pursue a variety of strategies. Some trade in and out of distressed bonds or loans, hoping to buy low when prospects look bleakest and sell on the rebound. Others pursue loan-to-own strategies in which they use the bankruptcy or restructuring process to exchange debt forgiveness for a share of equity.

As of Dec. 31, Washington’s PE portfolio had a total of $52.3 billion committed to 11 different fund types containing a combined total of 320 individual funds. Washington has drawn down a total of $44.5 billion and distributed $50.4 billion. It had a total investment multiple of 1.5x and a total IRR of 13.03 percent.

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