Chase CDO Fund Debuts Broader Strategy

The private equity affiliate of Chase Manhattan Bank has created the first in a proposed series of specialized funds that will expand Chase's investment presence in a swatch of sectors from high-yield corporate bonds to non-investment grade bank loans.

Chase Capital Partners has closed a $1 billion collateralized debt obligation (CDO) fund, Octagon Investment Partners II LLC, that will have a taste for a variety of paper, including B-grade bank loans, private equity and mezzanine securities. The fund, which should be fully invested by year's end, represents the first example of a new Chase investment strategy: category-specific funds that will bring in outside investor money but remain under the Chase aegis.

The new fund "is an opportunity for CCP to access outside money through institutional investors," said Eric Green, managing director at Chase Capital Partners. "We're looking to grow other [fund] managers that have specific focuses, such as convertibles or distressed loans, and build a family of these types of funds."

"We're looking to grow [Octagon] as an asset manager. That's the main idea and opportunity," he added. It is the first CDO Chase has sponsored, and is one of a handful of new funds that are staking serious claims on such areas as private equity and mezzanine bonds.

Managers enlisted in the proposed Chase battery of funds, like Octagon's CEO James Ferguson, will be paid via performance-based fees, rather than traditional asset-based fees, Chase said. In this way, fund managers have more flexibility and incentive to rack up inflows from the buy-side.

By launching Octagon, Chase joins other recently-launched funds from Apollo Advisors, Thomas H. Lee Co. and Blackstone Group, which are designed to go after the mezzanine bond market. The trend has been inspired in part by the financial troubles of last year, as a fund with an emphasis on mezzanine bonds, for example, can still thrive even during a debt market downturn.

Octagon started life as an investment unit inside the Chase organization and has now been spun off as a portfolio company of CCP. The fund is managed by Ferguson, whose team will maintain the CDO's bank loan and high-yield bond holdings that make up about 75% of the fund's total investments. CCP will manage the final quarter of investments, which will primarily be in the bank loan and private equity market.

The fund is capitalized with $500 million in bank credit facilities and $310 million in debt securities, while its equity interests now total in the $190 million range.

Ferguson and his team will make the investment decisions as it relates to the choice of individual bonds, while an investment committee at CCP will make the macro decisions as it relates to dropping or adding asset classes, for example.

The Octagon fund "is going to get a pro rata slice of what CCP does," Green said. On the equity side, CCP invested $1.8 billion in 120 new companies last year, with an emphasis on later-stage hard and soft technology. The company has also been active in growth equity in middle market buyout type companies, as well as larger style buyouts. Mezzanine investing and real estate are the two newest areas of interest for CCP, officials said.

Green emphasized that Chase will first ensure that the current fund is fully invested this year before considering any further fund ventures. "We fully intend to get this fund up before we come back to market with another." - Christopher O'Leary