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Duke Street's E1bn Duchess I CDO fund fully invested

UK-based Duke Street Capital Debt Management (DSCDM) has fully invested its E1bn collateralised debt obligation fund despite the relative scarcity of leveraged buy-out activity in Europe over the past eighteen months.

DSCDM director David Wilmot said the firm's success was in part down to the size of the fund, the largest European debt vehicle of its sort, meaning Duchess could comfortably ‘write big deal tickets' and was being invited into more transactions. It also helped that the fund could invest in both sterling and euro-denominated assets, he said.

Duchess I is currently split 80 per cent in senior secured loans, 10 per cent in mezzanine loans, and 10 per in cent high yield bonds. It had an original target of E750m but was increased to E1bn in response to strong investor demand.

The firm is now raising Duchess II. The fund has a tentative target of between E600m and E750m but the final size will depend on the asset outlook later in the year. If the leveraged buy-out market fails to pick up from present levels, damaging the prospects for speedily investing the fund, then it is likely to be sized towards the lower end of the range.

Wilmot, however, said he was optimistic about the outlook for the buy-out market, which has historically often stalled while buyers and sellers adjust their relative expectations. He predicted a ‘confluence of deals in September' and was ‘very positive for the final quarter of this year.'

There have already been signs in the past few weeks that activity may be on the point of turning upwards. A handful of big buy-out deals, like US firm KKR's record buy-out of Schneider Electric's Legrand unit, have been agreed despite the volatility of public markets.

The basic rationale of CDO funds is that it is cheaper to borrow money from capital markets than from banks. DSCDM raises finance from the markets against equity it has itself raised from investors and uses the resulting funding to back LBOs.

To manage the risk, the firm has to make sure that the fund is well diversified both regionally and sectorally. It has, for example, a limit on the size of the loan it makes to any single investor at around four per cent of the fund's value. DSCDM said it had turned down two out of every three deals the Duchess team had reviewed despite the relative scarcity of opportunities in the present market.

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