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Bear Stearns closes third fund on $2.7bn

Bear Stearns Merchant Banking will place an increasing focus on financial services companies as it seeks to differentiate itself from other ‘captive’ models.

Bear Stearns Merchant Banking, the private equity affiliate of The Bear Stearns Companies, has held a final close on its latest fund, Merchant Banking Partners III, at $2.7 billion (€2.1 billion).

The senior executives overseeing the fund are chief executive officer John Howard and chief operating officer Gwyneth Ketterer. Ketterer said that while the firm’s first two funds focused mostly on retail and branded consumer goods, the third fund will shift its focus chiefly to financial services.

“In sheer magnitude there’s more opportunity in and around financial services,” she said. “For us especially, there’s an opportunity where we can piggy-back on our in-house expertise – not necessarily investment banking, but the fixed income powerhouse that’s downstairs.”

BSMB’s target equity investment will be $100 million to $200 million per transaction. The firm began its fundraising process in September of 2005 when it set a modest $1.75 billion target. It held an initial closing in February 2006 at more than $2 billion. Ketterer said the firm attracted a host of new institutional investors for their third fund including CalSTERS, the Oregon Public Employees Retirement System and the New York State Teachers’ Retirement System. She attributed this to the fact that the firm has received significant endorsements.

“We’ve proved ourselves to the gatekeeper community,” she said. “We got the endorsement of all the leading gatekeepers, for a couple of them it’s the first time they’ve endorsed an affiliated model.”

Ketterer added that the firm’s second fund, a $1.5 billion vehicle raised in 2000, had more high net worth individuals that in your typical private equity fund. Now that the firm has established itself, she said, they are attracting more institutional investors.

The firm’s first fund, raised in 1997, has returned 5.3 times its invested capital.

The closing comes at a time when a number of Bear Stearns’ capitve peers have been pushed away by their investment banking parents. JPMorgan Partners seperated in 2005, and the private equity divisions at Credit Suisse First Boston, Morgan Stanley, Deutsche Bank have all been either booted out or forced to reshuffle their strategy amid concerns that in-house private equity groups could sometimes step on the toes of the investment banks’ private equity customers. Bear Stearns, however, avoids such conflicts by focusing its attention on the middle market.

BSMB was formed in 1997 and currently manages more than $4.5 billion. Recent investments by the firm include financial services companies ACA Capital Holdings and Churchill Financial Holdings, and backpack maker CamelBak.