HY Jitters Paves Way for New Fund

Responding to increased selectivity within the high yield bond market, Donaldson, Lufkin & Jenrette launched its previously announced mezzanine fund, the largest ever, with a focus on the smaller transactions that have been shunned by much of the buyside.

"The high yield market is not willing to finance smaller transactions, particularly deals below $200 million," said John Moriarty, the fund's chief operating officer. "That leaves a big hole that we hope to fill." Because of that lack of interest, DLJ Investment Partners II was able to lure commitments for $1.6 billion, more than double the fund's original $750 million target. With plans to borrow an additional $400 million, the fund's coffer could bulge to $2 billion.

Indeed, a lack of public offerings below $200 million in the high yield, convertible note, and preferred stock markets has created a demand for financing from the private markets. In 1999, public issuance fell to $12.2 billion, a 26.7% decline from the $16.7 billion placed for such companies in 1998.

The new fund, which already has committed investments of $250 million for eight companies, generally teams up with financial sponsors such as buyout and private equity funds through typical investments of $25 to $250 million. Financial sponsors take an equity stake and DLJ Investment Partners II complements the commitment with more senior financing.

"Our typical placement is a moderate risk investment in an established company that can support debt," said Moriarty, who declined to name any of the fund's sponsors or target companies. The fund's exit strategy, which Moriarty pegs at about five years, could either come in the form of an acquisition or an initial public offering.

Part of the reason for the size of the fund is a broad mandate that allows it to invest in a wide variety of industries and transaction types.

The fund gives DLJ an even larger arsenal of cash to do deals in varying market conditions. In addition to the mezzanine fund and a $3 billion merchant banking fund, the firm has a $1.25 billion bridge loan fund.

"[The fund] is doing wonderfully because we raised it right when the high-yield market was tanking," said Larry Schloss, head of merchant banking at DLJ.

Although he declined to comment on how much of the new fund would be invested in DLJ deals, Schloss said less than 15% of DLJ's first mezzanine fund was invested in DLJ Merchant Banking-led deals, Schloss said.