Strategic Value Partners has raised about $2.65 billion of a targeted $3.75 billion for its Strategic Value Capital Solutions II fund. SVP plans to invest roughly half the fund in Europe and outside the U.S., a strategy one committing LP says helped seal its deal.
Last week, the New Mexico State Investment Council doubled its previous commitment of $150 million to $300 million in SVP’s new fund. The $43 billion sovereign wealth fund’s investment staff and consultant say the SVP investments help diversify its debt portfolio beyond direct lending and other more conservative credit vehicles.
“We also like its geographical flexibility,” says Meketa Investment Group consultant Mary Bates, noting that SVP plans to deploy half the new fund in Europe.
The New Mexico SIC hired Meketa in 2022 to help with its private credit portfolio. SVP focuses most of its $18 billion AUM on distressed and stressed debt and similar special situations.
Fundraising for distressed debt in general slumped in 2023 to roughly $5.4 billion compared to $32 billion in 2022 and $36.6 billion in 2021, according to Pitchbook data.
Nonetheless, it appears LPs are again bullish for the higher risk, higher reward asset class. Preqin reported recently that LPs it surveyed say distressed debt is their most targeted strategy in the private credit bucket.
LP Appetite
LP’s appetite for private credit of all classes continues to grow and institutional investors are increasing their allocations to the asset class.
The board of the California Public Employees’ Retirement System, the country’s largest pension fund with $490 billion AUM, recently boosted it private credit targets from five percent to eight percent.
Non-bank lenders have grabbed roughly 30 percent of the credit market, or about $1.7 trillion globally compared to $300 billion at the end of 2010, according to Preqin.
Distressed Diversification
Now, some LPs are diversifying with distressed credit. Those investors are anticipating the persistent interest rate climate to push more over-leveraged borrowers into stressed and distressed situations.
SVP is shooting for a 13 percent to 15 percent net IRR and early returns on the $900 million deployed have been “in line with that expectation,” Bates says. In comparison, direct lending bets return, on average, roughly 10 percent.
SVP has already raised roughly $1 billion this year. An SEC filing showed $1.65 billion raised by the end of 2023 and SVP documents showed a first close in March 2023 at $1.5 billion.
The previous fund, SVCS I raised $1.65 billion in 2020.
Bates says the SIC’s visibility into the fund since its first investment in November 2022 aided the decision to double up.
SVP’s Strategy
The Greenwich, Conn. firm plans to purchase most of the loans on the secondary market rather than originating, a traditional distressed debt strategy.
SVP will focus on middle-market businesses, defined as having an enterprise value of no more than $1.5 billion. SVP plans to focus on asset-heavy industries, companies with “critical cash flow” with low technology risk.
“Think older technology,” Bates says. The SIC made its original commitment in November 2022.
Bates did flag a few issues, including bad bets made bad bets in shipping, oil and gas and has vowed to avoid those sectors going forward. Instead, it will focus on corporate debt and in the aviation, real estate and power sectors.
SVP beefed up its aviation team and investments in 2021 and 2022.
Bates also pointed out that SVP founder Victor Khosla and CIO still retains “a very large economic interest in the firm and has not widely distributed equity.”
But Bates says Khosla has “largely reinvested his carry into the firm.” He is also “actively increasing the number of participating stakeholders.”
Khosla founded the firm in 2001 and it now has $18 billion AUM compared to $11 billion AUM in 2020. Its investment team has grown from 41 in 2020 to 84 at the end of 2023.
Management Fees
The New Mexico SIC did not disclose the fees SVP was charging.
A $100 million commitment in 2023 the Wyoming State Loan and Investment Board made in the new fund showed SVP collecting a 1.75 percent management fee and 20 percent carry after and 8 percent hurdle. The size of the commitment was not disclosed.
SVP told Wyoming its dealflow pipeline has expanded from $79 billion in 2022 to 110 targets with a combined $250 billion in debt.
“Within the portfolio, the highest expected return positions incorporate distressed loan-to-own strategies,” Wyoming’s consultant RVK wrote in a memo.
Contact Meketa’s Bates at [email protected].
