Strategic Value Partners launches $1 bln Special Situations III Fund with eye on Europe

Founded in 2001 by Victor Khosla, a veteran of global distressed investing at Citibank, Merrill Lynch and Cerberus Capital Management, Strategic Value Partners plans to continue investing primarily in distressed debt and assets of middle-market companies. But its latest fund may mark its largest yet as it focuses on opportunities in Europe, according to a person familiar with the firm.

The firm, which employs more than 100 people, plans to leverage its presence in Germany and the U.K. to pursue opportunities from accelerated troubled asset sales by European banks. The firm has been active in those markets since 2004.

Burdened with large distressed debt portfolios, many European banks are selling assets in meaningful size for the first time in decades, with PricewaterhouseCoopers estimating non-core asset sales of $80 billion in 2013, up from $15 billion in 2010. Most of this distressed debt stems from middle-market companies with enterprise values of less than $1.5 billion.

“Investing successfully in this opportunity requires a full range of skills—from originating investments directly to leading both financial restructurings and operational improvements,” said a source familiar with the firm. “Few players possess a sustained, long-term and successful track record, particularly in Europe.”

Strategic Value Special Situations Fund I has turned in a 17.7 percent net internal rate of return and a 1.7x multiple of invested capital since its inception as of June 30, according to a source familiar with the firm. The fund closed in 2009 with $346 million in capital.

Strategic Value Special Situations Fund II has generated a net IRR of 16.7 percent. That fund closed in 2012 at $918 million, $318 million above its target.

All told, Strategic Value Partners has led more than 100 restructurings globally, with about half of those in Europe. The firm maintains offices in London, Frankfurt and Tokyo and manages about $3.4 billion.