Centerbridge pitches third distressed debt fund

  • Special Credit Partners III core fund targets $1.5 bln
  • Reserve fund targets $3.5 bln
  • Reserve fund to be activated only if opportunities arise

Centerbridge Partners is in market with its third distressed debt fund that will put a bulk of capital in reserve to spend if the market spirals downward, according to a limited partner with knowledge of the fund.

Centerbridge Special Credit Fund III is split into a core fund targeting $1.5 billion and a reserve fund targeting $3.5 billion, the LP said. (Preqin reported earlier this year that Fund III has an overall target of $6 billion.)

Centerbridge did not respond to a request for comment. Special Credit Fund III focuses on investments in non-control, distressed debt.

Special Credit Fund III focuses on investments in non-control, distressed debt.

The reserve fund “may never be turned on” depending on what happens in the market, the LP said. “The credit cycle is turning a bit … It’s not entirely clear to market participants as well as to LPs whether this will be a massive opportunity outside a few select industries,” the LP said.

The structure of Fund III is a reflection of Centerbridge’s belief it could deploy $1 billion to $1.5 billion for what is in the market today, the LP said. Fund investors won’t start paying fees on commitments to the reserve fund unless that vehicle is activated, the LP said.

The core fund and the “flex fund,” as the LP described it, both have three-year investment periods.

Centerbridge is run by Jeffrey Aronson and Mark Gallogly, who founded the firm in 2006. Special Credit Partners II, which closed on $2 billion in 2010, generated a 1.03x multiple and a 1.39 percent internal rate of return as of Sept. 30, 2015, according to Preqin.

Oaktree Capital Management uses a similar structure in some of its funds. The Howard Marks-led firm targeted $3 billion for its Opportunities Fund X and $7 billion for Fund Xb for investments in distressed debt. Fund Xb would be held in reserve and activated if the opportunity arose, Buyouts reported.

“While more interesting debt opportunities are on our plate now than at any point in the last five years, we plan to be patient and wait for a pickup in default rates before becoming materially more aggressive in investing our capital,” Marks said on an earnings call Feb. 9.

Anecdotally, several LPs said they are interested in looking at distressed funds this year. Preqin found that 11 distressed debt funds raised $21.4 billion in North American and Europe last year.

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Photo: Jeff Aronson, founder of Centerbridge partners LP, speaks during the Wall Street Journal Deals and Dealmakers conference in New York June 11, 2008.  REUTERS/Chip East