DDJ Capital Management is banking on plenty of distress in the economy and is raising a new $212 million fund to invest in bank debt, debtor-in-possession loans, second-lien term loans and Chapter 11 exit financings. "We see extensive deal flow in the distressed area of the market and we wanted to access more capital for investment," said Mike Forrester, chief operating officer of DDJ.
The Wellesley, Mass.-based investment firm has launched the DDJ Total Return Loan Fund, which also aims to capitalize on the failure of traditional senior lenders to provide middle-market financing. The fund plans to make 15-25 investments over three years, with an average size of approximately $10-20 million. Leverage of between 25-50% of the assets will be used.
Approximately 20-30% of the fund will be secondary debt purchases and 20-30% will be in DIP loans. The remainder will be private loans with equity kickers. The target return for the fund is 15-20% annually. To date, the firm has invested more than $500 million in these types of investments scoring major gains on Qwest Communications International, Westpoint Stevens and Bell Actimedia. The firm is also currently invested in the second-lien term loan of PG&E Corp. and the "B" loan of TVI.
Despite record low defaults in 2004, hedge funds specializing in distressed debt earned an average 15.62%, the highest in the industry, according to the CSFB/Tremont Hedge Fund Index.
DDJ was formed in 1996 by Fidelity Investments' Associate General Counsel Judy Mencher and David Breazzano, who managed $4 billion in high-yield and distressed assets, also at Fidelity. Bob Hockett is the third principal of the firm. The trading team, meanwhile, is led by David Goolgasian, managing director. DDJ officials have invested $2 million, with the remainder of the capital having been raised from pension funds.