Those private equity managers with the nerve to throw failing companies a lifeline score higher returns than their regular buyout counterparts, new research shows.
Whether turnarounds, special situations or distressed debt, riskier strategies deliver LPs more bang for their buck.
Preqin's Private Equity Quarterly Index shows that returns from buyouts and real estate funds lag behind funds with distressed strategies, while funds of funds and venture capital languish far behind on average.
Distressed strategies score 322.1 on Preqin's index as of September 2011 versus 252.4 for buyouts, and 198.5 for all private equity types.
The results have been clearly swayed post-2009 as GPs exploited the pile of struggling companies hurt by the downturn. Even so, distressed was one of the best performing strategies prior to the crash.
The tactic of buying up troubled loans has been hitting the headlines recently as Bain Capital’s distressed debt arm Sankaty Advisors works out a contentious deal with Lloyds.
Bain is attempting to buy 26 buyout loans worth £500m as Lloyds rebalances its books, but some of the private equity firms whose loans are part of the portfolio are exploring legal options as a means of blocking the deal.