Providence may increase debt fund target to $1bn

Providence Equity Partners has joined the growing number of big buyout firms launching distressed credit funds to capitalise on market turbulence – and in many cases buy up their own LBO debt at a discount.

The US firm went to market with a media- and communications- debt fund just weeks ago, and already finds it oversubscribed. Investor interest is causing it to consider raising the hard cap to $1 billion (€630 million) from $700 million, a person familiar with the situation told PEO, confirming earlier media reports.

The fund, which held its first close after 20 days in the market, will allow Providence to buy back debt associated with its own deals, such as the pending $52 billion buyout of Canadian telecom giant BCE. It will only be allowed to do so, however, during certain time windows purusant to regulatory rules.

Lenders are now reportedly looking to sell some of the $16.8 billion in loans linked to the BCE buyout, a club deal also involving Teachers’ Private Capital, Madison Dearborn Capital Partners and Merrill Lynch Global Private Equity. Deutsche Bank and Citi, both part of the underwriting group for BCE, have each recently been reported to be in talks with private equity firms regarding the sales of certain tranches of LBO debt.

TPG, The Carlyle Group, Apollo Management, The Blackstone Group and Oaktree Capital Management are among the firms that have raised or are raising hung bridge or distressed credit funds.

All of the sponsors involved in the BCE deal have the ability to purchase debt securities. Mark Tresnowski, a Madison Dearborn managing director and general counsel, did not discuss the BCE deal nor Providence's plans but told PEO that buying debt related to a company in which a firm is also an equity holder “gets to be tricky because there are potential conflicts of interest”.

Still, he said many firms are able to iron out or avoid potential conflicts and are doing these types of deals.

“With dislocation of the debt markets you can get private equity-type returns just by buying debt securities,” he told PEO. 

Madison Dearborn’s funds enable it to opportunistically purchase debt securities, including in companies in which it is an equity holder, but Tresnowski said that is not the firm’s main focus. The Chicago-based buyout shop is currently targeting $12 billion for its sixth fund, according to Probitas Partners’ 2008 Private Equity Deskbook.

Investors in Providence’s current media- and communications-focussed buyout fund, which closed in February 2007 on $12 billion, include heavyweight North American LPs like the California Public Employees’ Retirement System, Teachers’ Private Capital, the Washington State Investment Board and the Illinois State Teachers’ Retirement System.