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Private Equity

Funds raised to pounce on corporate distress sprout up as investors see opportunities

An investment strategy designed to thrive in a downturn appears to be returning to popularity this year.

An investment strategy designed to thrive in a downturn appears to be returning to popularity this year.

A string of investors, including Oaktree Capital Management and JP Morgan, have been marketing so-called special-situations funds, which seek to capitalize on troubled industries and credit-constrained companies.

The rise in demand for the special-situations strategy comes at a time when analysts are anticipating that more companies will contend with high levels of cash burn and an erosion of profit margins amid tightening financial markets, climbing inflation, rate hikes and other economic disturbances.

JP Morgan’s asset management unit on Monday closed its Lynstone Special Situations Fund II, raising $2.4 billion from global institutional investors. That new vehicle, which surpassed its $2 billion target, seeks to invest in “stressed, distressed and event-driven situations” in European and North American credit markets and targets assets battered by illiquidity or market disruption, according to the announcement.

Oaktree, one of the oldest distressed-debt investors, is currently marketing its third special-situations fund, seeking to raise $2.5 billion to $3 billion for the new vehicle. The company uses its special-situations funds to invest in mid-market companies through the purchase of distressed debt, structured equity and direct equity investments.

Other big names adding investment firepower in the market include MidOcean Partners, which is marketing a new fund, Tactical Credit Fund III, to invest in stressed and distressed assets, according to PitchBook data.

Funds targeting debt and equity investments in troubled companies last gained traction during the height of the COVID-19 pandemic, when economic and financial shocks significantly increased financial uncertainties for many businesses.

A wave of investors quickly hit the market in 2020 with new funds to buy heavily discounted debt at struggling companies and seek control of businesses in restructurings, including Cerberus Capital Management, Fortress Investment Group, Highbridge Capital Management and PIMCO.

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