Duke Street Capital Debt Management (DSCDM), the debt fund management division of the European private equity group, has held a final close of Duchess II, the firm’s second Collateralised Debt Obligation (CDO) fund.
The fund, which invests in both sterling- and euro-denominated senior secured debt and mezzanine mainly used in Western European leveraged buyouts, closed on E550m. It has been arranged and structured by CIBC World Markets and Société Générale.
A CDO fund is a pool investment vehicle set up to buy debt assets. To finance its investments the pooled vehicle issues bonds to investors. Investors are able to buy bonds of differing risk profiles, ranging from AAA to unsecured equity.
David Wilmot, a director at DSCDM, said the firm was pleased with the response from institutions to Duchess II in what had proved a challenging investment climate. “Institutional demand has been difficult to pin down. It was more difficult to sell the rated notes this time, but we met with very good support from equity investors”, he said, adding that the E52m equity portion of the fund had been oversubscribed, with Duke Street Capital retaining 15 per cent of it on its balance sheet.
The fund is already approximately 80 per cent invested. It is anticipated it will be fully invested within three months. Said Wilmot: “We benefited from a strong supply of assets in the first quarter. Q2 might be a bit quieter, but availability of collateral should still be adequate for what we need. The asset pipeline has a way of changing quite quickly.” DSCDM may launch a third CDO vehicle in the foreseeable future, he said.
Duchess II is the largest CDO to close in Europe this year. Duchess I, DSCDM’s first CDO closed at E750m in June 2001 and was increased to E1bn in February 2002 through a tap issue.
DSCDM was set up in 2000 as a platform for establishing a multi-fund debt management business. DSCDM offers existing and potential Duke Street Capital investors diverse investment opportunities with a variety of risk profiles.
Ian Hazelton, chief executive of DSCDM, said Duchess II would build on the firm’s established role as a significant investor in European LBOs. “We continue to believe in the strength of the European LBO market and look forward to continuing to invest in it for the benefit of all our investors in both Duchess I and Duchess II.”
The first European asset manager active in the private equity market to expand into CDO-style debt management was Intermediate Capital Group, the mezzanine specialist. ICG established a CDO business in 1999.
Also active is Alchemy Partners, which acquired a CDO manager from Barclays Global Investors last year, albeit as a portfolio investment, whereas DSCDM is a wholly owned subsidiary of Duke Street Capital.
In the US, The Carlyle Group and The Blackstone Group are among the diversified alternative asset managers to operate CDO investment funds.