When Good Performance Is A Bad Thing
Every firm wants returns, but sometimes getting them too early can cause unexpected complications. This is specifically true for a number of distressed debt firms, which earned returns on funds that were still in the process of being raised. To illustrate, let's take a look at a firm whose name I've promised not to share (sorry). It entered the market with a $1 billion-targeted fund last year and gathered commitments worth around $500 million. Seeing a strong opportunity as distressed debt trading levels rose, the firm held a number of closes on the capital and invested it. The value of distressed debt improved so dramatically in 2009 that the firm’s invested capital generated an IRR of 60% in just six months. That’s great news, except those returns, which occurred during fundraising, create a tricky conflict for a manager of a closed-end fund.
