During economic upturns, they’re called contrarian funds. In times like these, they’re considered the obvious place to be igniting dry powder.
These are the turnaround and distressed debt funds earmarked for control-style investments in troubled companies; the mezzanine funds deployed to patch holes blown into capital structures by the credit crunch; secondary funds that provide an escape hatch for limited partners looking for a way out of their 10-year lock-ups; and debut funds whose managers can do deals without the encumbrance of a suffering portfolio of prior investments.
They sound like good bets to me, assuming experienced and competent managers are at the helm. But just to make sure, I corralled performance data for each of these four categories from our recently-assembled sample of pre-2004 global private equity funds collected from eight public pension funds and described in more detail on page 34 of the Nov. 17 issue of Buyouts. Below are the results in table format. Note that many of the sample sizes are quite small, and that we don’t have IRRs or investment multiples for all of the funds. That said, here are a few observations:
• It’s often said that debut funds outperform their peers. But in our sample they didn’t do measurably better or worse than the entire sample of global buyout funds.
• The performance—judged by bottom-quartile, median and top-quartile investment multiple—of the turnaround and distressed debt, mezzanine and secondary funds was much more tightly clustered than for the sample of global buyout funds. This suggests a lower risk profile for these kinds of investments, not a surprise for mezzanine funds, but more of a surprise for turnaround and distressed debt and secondary funds.
• Not a single secondary fund in our sample (though admittedly small) lost money, while the range by investment multiples was the smallest of any fund category, just 1.2 to 1.7.