Quadrangle Plays On Distressed Debt –

While media and telecom investors already seem to be playing in distressed sectors, New York-based Quadrangle Group last month shunned the redundancy and launched a dedicated distressed debt vehicle. The new hedge fund will be marketed with a $500 million target cap, and will hold its first close today with internal cash from Quadrangle Group partners. Additional closes from outside investors will be held on the first day of each month beginning May 1.

“Private equity groups getting involved in distressed investing is just a function of a new reality,” says a source familiar with Quadrangle’s decision. “A higher and higher percentage of buyout opportunities are coming from the distressed marketplace, so you need an understanding of the distressed market, if not an actual fund itself.”

Such a scenario is especially salient for Quadrangle Group, which was formed in 2000 to invest primarily in telecom and media properties. Following more than a year of watching its target market get hammered by the recession and sector saturation, Quadrangle Group’s revised goal is to approach investments from a variety of angles.

In a letter to existing investors, Quadrangle Group says that the new distressed debt effort would provide its $1.08 billion private equity fund with two distinct advantages. First, the hedge fund will increase access to media and telecom deal flow and expertise. Second, it will help the firm better assess and handle potential portfolio companies in need of distressed debt restructuring.

The letter also identifies the new fund’s senior management team, which will operate as a distinct group from the firm’s private equity operation. Leading the new unit will be a trio of investors from Lazard Freres & Co., each of whom was involved in the relatively new Lazard Debt Recovery Funds.

First up is Michael Weinstock, who was most recently managing director of Lazard and co-portfolio manager of the debt recovery effort. He sits alongside new Quadrangle hire, and former Lazard director, Andrew Herenstein. Filling out the group is Christopher Santana, who will be a vice president, and previously served as vice president and head trader of the debt recovery funds. The group is also expected to sign on some junior staffers.

A source said the three investors began discussions with Quadrangle Group in early February, and decided to leave just a few weeks later as they did not want to accept March hedge fund commitments if they wouldn’t be around to invest them. The trio also seems to have had some significant conflicts in regards to some proposed changes within the Lazard restructuring group. The Wall Street Journal has reported that Lazard will wind down its $280 million debt recovery funds, and that no information is currently available as to whether or not the bank will continue the effort. Barry Ridings, who runs Lazard’s restructuring group, was unavailable for comment at press time.

The Quadrangle Group founding team also had previously worked at Lazard.

Will They Buy It?

Despite recent fund-raising troubles for private equity firms, Quadrangle Group will likely encounter little resistance with its distressed debt vehicle. With the high-yield market returning and defaults at an all-time high, the market is ripe for the opportunities this type of hedge fund can offer.

Many institutional investors have active distressed debt portfolios, and will likely be interested in the Quadrangle offering. California State Teachers’ Retirement Systems (CalSTRS), for example, recently had an extensive investigation into the benefits of raising its distressed debt allocation. The pension fund ultimately rejected the suggestion, but a CalSTRS spokeswoman confirms that the group is maintaining past commitments and is actively looking for new opportunities.

The Quadrangle Group distressed debt fund will be sold directly, unlike the firm’s use of a placement agent on its private equity fund. In addition, it will only invest approximately 30% to 40% of its capital in telecom and media deals, with the rest spread across a broad array of industry sectors.

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