Distressed debt investors have not had much to feast on in the recent boom years. Known as "vulture funds" for their adroitness in swooping on companies when they are at their weakest, the few firms that operate in this corner of the market have had to subsist on the rare company that hit the rocks while the rest of the economy powered inexorably ahead.
Yet as the ripples from the meltdown in credit markets extend to the rest of the economy, they are ready to pounce, armed with an unprecedented arsenal of capital. According to Private Equity Intelligence, distressed debt firms in America and the UK have raised $15.6bn (£7.8bn) in fresh funds so far this year, which is already more than the record $13.9bn that was raised in all of 2006. Add the 22 firms seeking to raise an additional $29.3bn in vulture vehicles this year, and never has there been more money devoted to cashing in on a coming crash.
"We are just at the tipping point in the market that we have been waiting for for a year and half," said Ian Cash, head of the £300m distressed fund raised by Jon Moulton's Alchemy Partners. "We are very bearish on the US economy. We think the housing market will drag the US economy into recession by the first quarter of next year, and that will lead to a significant increase in default rates, especially in highly levered private equity deals. Fundamentally that's what we are waiting for. This will create forced sellers. We are very encouraged by what we are seeing."
Vulture funds buy debt in default for pence in the pound and then renegotiate for better prices as companies restructure or are liquidated. The same private equity firms and banks that did so much to inflate asset prices by eagerly leveraging them to the hilt are leading the growth of the market. Private equity giants Blackstone, Texas Pacific and Alchemy have all raised distressed funds. The largest in the world is the $7.5bn fund raised by Cerberus, the New York firm chaired by the former US Treasury Secretary John Snow, that bought Chrysler earlier this year. Hedge funds such as Och-Ziff and Appaloosa Management are also very active in the sector.
They will be rubbing their hands with glee at early signs that the record low levels in corporate defaults of recent years look set to come to an end. Wal-Mart, the world's largest retailer, issued a profit warning this week. That followed the bankruptcy of one of America's biggest mortgage lenders, and warnings about the solvency of several others. The contagion has spread to Europe, leading to massive hedge fund losses and a near-complete seizing up of the credit markets.Reuse content