A US private equity firm is setting out to buy distressed European companies in need of turnaround, moving into an area currently ignored by most European buy-out firms. Sunrise Capital Partners is raising a $500m (¥500m) fund for investment in Europe, mainly the UK, as well as the US. It is marketing to a number of European institutions this week.

Larry Coben, senior principal of Sunrise, said: “There is very little capital in this space. The opportunity is 10 times the size of the funds focusing on it. Investor interest in the area is now growing.” The fund will be the firm´s second. The first achieved an annualised return of 45%. The Pennsylvania School Employment System, the largest investor in the first fund, has already agreed to commit up to $150m. The principals of Sunrise Capital and Houlihan Lokey have committed $20m.

Sunrise draws comparisons with Alchemy Ventures, the UK firm led by Jon Moulton, except Sunrise focuses exclusively on turnaround situations. Most firms leave the activity well alone since it is risky and demands particular skills and experience.

Coben said he expects rich pickings over the next three years among the firm´s target companies, which have sales of between $50m and $700m. “The economic downturn has caused default rates to soar to a 10-year high,” he said. “Corporate cashflow is declining and banks have withdrawn from lending to medium-sized companies, leaving them without the capital to restore themselves to value. “Strategic buyers don´t like to acquire distressed companies. It´s messy and a career risk for the managers they put in place. All this leaves opportunities for us.”