Donaldson, Lufkin & Jenrette last month launched its second mezzanine fund, DLJ Investment Partners II, L.P., with a target of $750 million.
The group is one of several firms that believes the time is right to raise a large mezzanine fund because financial buyers are investing increasing amounts of capital and the credit market is still tighter than what it was before the stock market correction. Firms including Capital Resource Partners (see story, p. 10) and TCW/Crescent Mezzanine, L.L.C. (BUYOUTS May 4, 1998, p. 1) are also in the market with similar efforts.
DLJ, however, is launching a fund that has a slightly higher target than those efforts, and its fund could become the largest mezzanine vehicle raised in several years.
The group believes the $750 million target is appropriate given its investment pace over the last two years. DLJ raised the $400 million DLJ Investment Partners, L.P. in 1996 and has invested about 90% of the vehicle, said Thompson Dean, who manages the effort. One of DLJ’s most recent investments was providing a $40 million tranche alongside DLJ Merchant Banking Partners in the buyout of Environmental Systems Products Holdings, an emissions testing company. The mezzanine fund acquired 13% senior subordinated notes, and DLJ Merchant Banking Partners invested in $90 million of discount notes, Mr. Dean said.
DLJ’s mezzanine partnership typically invests alongside buyout funds, including those not sponsored by DLJ, and retains the option to acquire preferred stock or warrants. Mr. Dean said it structures deals liberally to generate the best returns, sometimes offering a low coupon rate in exchange for a promising warranty kicker or charging a high interest rate regardless of the warrant.
The parent investment bank has committed $150 million to the partnership, and DLJ will raise the rest of the effort from outside investors.