Distressed opportunities abound

Distressed debt is one prospective growth area within the private equities space identified by Standard & Poor’s (S&P) latest asset allocation report.

The report found that while the consensus view that volatility had returned to traditional equities and bonds was holding, barriers to entry and a dearth of evidence showing strong returns make indiscriminate investment in private equity a risky proposition for individual investors.

While it found the performance of the average global-listed private equity fund had been modest, showing strong correlation with mainstream equities, more specific private-equity style investments do exist.

“It is just that it remains incumbent on investors to understand what the opportunity is and why it should produce the returns that it does,” it said.

Simon Ibbetson, S&P director of investment consulting, said distressed debt is one area it would be watching with interest in the coming year.

He said that investment managers’ divestment of underperforming company stocks in the current climate of portfolio rationalisation presented significant opportunities.

“As interest rates creep up and restructuring [of portfolios] happens, there is going to be more opportunities for them.”

The report said that while private equity can add value, access to the best opportunities was in most cases dominated by an elite group of the largest investment managers, to the detriment of individual investors.

Speaking about private equities in general, Ibbetson said: “Private equity offerings do not always seem to live up to their claims as a diversifier and return enhancer.

“Private equity can add value, but experience shows us that only a few of the best, largest and hence most exclusive managers tend to prevail.”