Allied Capital plots $500M LBO fund

Allied Capital Corp. plans to raise a traditional limited partner-supported buyout fund this year, with Goldman Sachs serving as a cornerstone investor.

The publicly traded business development company has not yet begun raising cash from other investors, but hopes to have the fund closed by the end of the year, a source familiar with the effort told Buyouts, a PE Week affiliated publication. Allied Capital plans to raise about $500 million and will use the fund to take both control and minority positions in target companies.

The fund, which has not yet been named, will be a departure for the $5.2 billion, Washington, D.C.-based corporation.

Traditionally, the BDC relies on raising capital from the public equity market to finance its debt and equity investments in mid-market companies. But the firm has been known to diversify its offerings. Last year it raised a $125 million senior debt fund and committed to supply junior debt to a $3.6 billion unitranche fund in partnership with GE Commercial Finance, which is responsible for the senior debt.

“[The company is] not changing [its] business. It’s a new source of capital,” says a source familiar with situation.

Allied Capital has not previously raised traditional institutional equity funds because it does not want to be seen as competing against its LBO firm clients, whose deals it helps finance through senior and subordinated debt commitments. This fund will not deviate from that approach. As a result, the company plans to use the fund only to invest in proprietary opportunities or those in which it will not have to compete with clients, the source says.

Allied Capital wants to diversify its sources of capital, and does not want to limit itself to raising cash from the public market, especially in today’s turbulent economy. In addition, the company stands to collect additional revenue from the fund through management fees and carried interest.

In January, Goldman Sachs’ Private Equity Group committed $125 million to future Allied Capital investment funds. As part of the same deal, Goldman Sachs also paid $197 million for a slice of Allied Capital’s debt and equity holdings, as well as a stake in its venture capital and limited partner investments.

American Capital Strategies, another BDC, is also on the road seeking $2 billion for its own debut LBO fund. Allied Capital’s decision to raise an equity fund was not a response to American Capital Strategies’s effort, the source says.

The firm has not decided yet whether it will hire a placement agent.