Would you work at this distressed fund?
Doing diligence for recruiting, but will keep the name anonymous. Would you join a distressed fund with the following statistics? I’m not sure if this can lead to decent fundraising so wanted to check here:
Fund sits in a larger platform. Distressed fund vintage 1 is from 2020, 10% irr, 3rd quartile, 80% DPI. Vintage 2 from 2024, 8% irr, 3rd/4th quartile depending on source, sub 20% dpi. Fund 1 to fund 2 was a down raise of about 30%. Fund 2 is close to deployed so any new hire is looking at fund 3/4/5 etc for economics and promotions.
Is this viable? Thanks in advance
Tough but not unusual setup. There's a reason why distressed is unpopular amongst allocators. Do yourself a favor and pursue a more flexible mandate than a distressed mandate like this one that owns shtco reorg equities it can't monetize.
Thanks! What are some funds that you think have better set up? If you could share the names would be very appreciated!
is it multistrat or purely distressed? What type of distressed? Control or trading focused? 80% DPI for 20 vintage implies trading bias. work for a distressed fund and can give feedback. '20 vintage return doesn't sounds great given covid dislocation. down raise is not good but i've seen some funds do smaller funds intentionally based on "distressed market opp". also have seen some larger funds with good returns struggle to deploy, so the returns look decent, but factoring in uncalled capital is a wash.
Purely public distressed. Both funds are basically called at this point. Returns are unlevered .
Marketed returns were targeting 15%+ net. Drawdown structure (capital locked up and 2/20 fee). Thanks guys!
ehh. tough call without understanding whats in the book. Fund 1 - 10% net with 2/20 structure. the headline return is ok by all means, but compared to the covid dislocation funds, its underwhelming on a relative basis. Incumbent LPs would be ok with results so far and wouldn't automatically NOT reup in subsequent vintages. 2/20 structure is priced on the higher end. mgmt fee could be lower. Larger LPs are getting rebates so the their actual return should be higher. Also LP could be receiving preferential coinvest arrangement. i like how quickly they deployed and current fee structure is priced with room to cut fee deals. LPs get annoyed when they cut a big check and the GP can't put money in the ground. DPI is good-ish, another 0.2x and LP basically have their money back after 6yrs. Fund 2 - current return is not great, but it is still a positive high single digit return, just not what one wants when putting money in locked up vehicle. Its a fresh vintage, so the return is difficult to gauge/handicap. Given distressed focus, there could be current positions with convexity. Similar to PE, where the expected return is j curved. i.e, firm built position and purchased debt as it began to trade down. various entry points and is now largest lender and driving the RX and majority owner of post reorg.
look at the MOIC as well. recent funds have had decent IRRs bc they are trading short term things. so its higher IRR but low MOIC. i.e., i bought X and flipped after 3 months for a 15% return. annualize that and your IRR gets whacky.
underperforming the stated fund objective is never great. the fact that sits within a larger platform is slightly comforting in that, in a very negative scenario, you could fold into opportunistic mandates within the firm. based on the limited information provided, i would say it is viable but will require tact to navigate as the path forward is certainly not clean. but you need to be cleared eyed in understanding that future funds may be smaller, and you might have cut deals to successfully raise.
Super helpful, thank you.
I decided to pass on that opportunity - 1) spoke with friends in LP / allocation space and understood the manager has many other underperforming products / funds too, hence the platforms reputation / pull at LPs is questionable, 2) due to the first reason, many consultants no longer cover the fund, 3) LP friends site the sub 10% irr as underwhelming / not what they would sign up for ,4) fund went from kind of bad in 1 to even worse in 2 making it a hard fact pattern for LP IC unless new leadership / IC installed at the fund, 5) this fund in particular focuses on liquid credit, so hard for LPs to coinvest , 6) LP math is unless you have returned capital fully back, they won’t be able to find more money for you. The designated pool for credit isn’t growing larger uniformly. If performance is strong then they can find money, but performance is on the weaker end (LP friends citing 13% net as what they consider strong but still nothing to write home on, having seen 15%+ net too as the top performance). Since this fund has done 2 vintages and combined capital return below 1.0x, and LPs expect what’s still in the book 1 to be assets that are harder to monetize, every one of the friend I asked says it would be a lot smaller or no raise (fold to other teams).
Sharing this here, hope it helps everyone else whose looking.
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