03/31/2010

Bayside Finds Formula for Instant Fund

Bayside Capital is preparing to wrap up marketing for its latest distressed-asset fund, after just a few months of quiet talks with investors.

Sources said the H.I.G. Capital affiliate expects to hit the $1 billion equity limit for its Bayside 3 vehicle by the end of April, amassing all of the capital in a single close.

What makes the effort particularly noteworthy is that Bayside has been able to line up investors quickly even though a number of factors should have been working against the firm. For starters, demand for distressed-debt funds in general has been weak. And the offering's January launch came close on the heels of its 2008 predecessor.

That helps explain why the new fund's capital-raising capacity is only a third of what Bayside raised for Bayside 2 - technically its debut fund.

But the Miami firm still didn't see fit to stage a broad marketing campaign, choosing instead to go with a somewhat covert approach focusing on specific investors. It also stuck with a fee schedule that might have been a turnoff for some backers, taking 2% of committed capital and 20% of earned interest once a hurdle rate of 8% has been achieved.

Most distressed-debt shops pocket a 1.5% management fee, if they can get away with even that much. Last month, investors pressured TCW into halving the management fees for its TCW Special Mortgage Credit Funds 1 and 2, to 1%, while reducing their performance charges to 5% from 20%. Those vehicles invest in devalued mortgage-backed securities.

Bayside, on the other hand, seeks control of companies in a range of industries worldwide through its debt purchases, zeroing in on those with enterprise values of up to $400 million. Endowments have proven particularly fond of the approach in the past, as they generally seek diversity in their holdings. This time around, Bayside is going after a wider group of institutions.

It helps that the firm's performance has been soaring lately. Bayside 2 is running an internal rate of return over 50%, even though the vehicle is still early in its holding period. Many other distressed-debt vehicles have lost money after buying at higher prices than are available today, making it harder for their managers to raise fresh capital. For example, Carlyle Group has had to stage an extended marketing drive.

Bayside's investment team is led by John Bolduc, who joined H.I.G. in 1993.