The Deal – MatlinPatterson closes fund at $1.66B
By Vyvyan Tenorio, October 7, 2004

New York distressed debt specialist MatlinPatterson LLC has closed a second fund at $1.66 billion, overcoming a more difficult fundraising environment than when it raised its first fund in 2002.
When founders David Matlin and Mark Patterson left Credit Suisse First Boston to form their own fund, raising $2.2 billion, it was a time of high-profile bankruptcies and mounting defaults in the U.S. At the time, CSFB was a major contributor, investing about $475 million from different pockets, including private banking and pension funds.

This time, with a much improved economic environment in which default rates have dropped and bankruptcies have eased, MatlinPatterson faced much more challenging fundraising conditions – in part the result of mixed perceptions over the new fund’s investment prospects.

In addition, CSFB did not participate in the second fund. But Patterson says the partners still raised just slightly less than the previous fund, minus CSFB’s contribution.

In contrast, he pointed out that Oaktree Capital Management LLC, the world’s largest distressed securities player, with $25 billion in assets, recently closed a $1.18 billion fund, about a third of its previous $3.5 billion pool. Oaktree chairman Howard Marks, however, commented that “We just don’t think there are as many good investment opportunities.”

MatlinPatterson, which took WorldCom, now MCI Inc., out of bankruptcy, acquires distressed bond and bank debt and tries to gain control of companies through equity conversions in restructurings. It owns stakes in Santa Ana, Calif.-based chemicals producer Huntsman LLC and Oxford Automotive Inc. of Troy, Mich., among other investments.

Patterson acknowledged that “it was a dramatically tougher fundraising environment, but we feel pretty proud about the outcome of the fund.” He said both funds have tried to tap investors who believe in the firm’s strategy “of doing in effect deleveraged buyouts of bankrupt companies.”

He added that a “good chunk” of previous investors probably invested because they thought it was a good time to invest in a control distressed fund. “We got lucky in our first fund, by having people give us money based on their timing views, not ours,” he said.

He declined to name specific investors, but among the investors are the Canada Pension Plan’s Investment Board and University of Texas Investment Management Co.

Patterson says the previous fund has returned just over $1 billion to investors so far, coming from partial distributions at MCI and Minneapolis-based NRG Energy, another portfolio company. According to Utimco’s latest performance data, the first fund is showing an 11.8% interim internal rate of return as of Feb. 29.

Patterson argues that the fund, which will invest globally, will have no shortage of opportunities and will have a better time at it. “When defaults were on the rise, we could shop more aggressively, but can be dangerous because everybody is acting in a panic,” he said. “Today, there are still bankruptcies around the world, but we have lots more time to evaluate them.”