Deerfield Capital Management is raising up to $150 million for a distressed fund that will allocate 80% of its capital to high-yield bonds and syndicated bank loans. "Bond defaults are at a 10-year high, and last year distressed loan trading stood at $41.8 billion," saidJohn Brinckerhoff, director of marketing, on the timing of the fund. "The growth in the market has outpaced the capital allocated to the asset class." Additionally, distressed debt does better in an economic recovery, he noted.
Aaron Peck, senior portfolio manager and director, will head up the new special opportunities group, which the new fund is part of. He joined Deerfield in April from Black Diamond Capital Management, where he was a senior analyst for a $1 billion portfolio. Deerfield also is on the lookout for additional hires, and the group could expand with analysts as the fund grows.
Peck reports to bank loan veteran and Deerfield CIO Jonathan Trutter. Although Peck's distressed group is separate from Trutter's bank loan group, it can leverage off of the extensive analysis at Deerfield, Brinckerhoff explained.
The fund, called DCM Special Opportunities Fund, will employ two strategies, directional trading and relative-value arbitrage, throughout the capital structure. Brinkerhoff defined distressed debt as bank loans priced at or below 90 cents on the dollar and high-yield bonds at 1000 basis points over Treasuries. In addition to bank loans and bonds, the fund also will invest in convertibles and preferred equity. He noted that the fund size is being kept small deliberately, and the targeted annualized returns are conservative at 20%. As soon as the target amount is raised, the fund will start allocation, he said, declining to provide a more specific timeframe.