With many portfolio managers primarily focused on one type of capital, CDO manager Friedberg Milstein maintains that not every debt package calls for the same type of investment.

The firm maximizes this integrated capital strategy by using low leverage technology and applying it to interesting asset classes like mezzanine debt, said Eric Green, senior partner at Friedberg Milstein. While many firms do not include funds for sub debt, for example, FM allocates space for such investments, as well as for stressed and distressed debt, Green said.

And the focus seems to be going over well for the firm, which has seen several other managers, including the Blackstone Group and Global Leverage Credit, raise similar funds during the past year.

"[This strategy] has worked great for us on both ends," Green said. "Our investors really appreciate our ability to look through and find the best value in the capital structure and for key relationships with LBO groups, it is great because we can provide capital in whichever bucket the company needs."

A well-rounded fund

Indeed, the firm has just closed FM Leveraged Capital Fund II at $411 million, its third collateralized debt obligation since the group's inception in 2003, which will invest in first lien senior loans, second lien loans or notes and mezzanine or subordinated notes.

The new fund was very well received, according to the firm, with the majority of commitments from institutional investors. About half of the fund was invested at closing, making the firm's commitments selective compared to most CLO funds where a higher percentage is typically invested at closing, three-fourths or more. And though the investment process has begun, percentages for its investments are not specified, giving management elbowroom within guidelines of the fund. "As a manager we have targets [for investments] but we have the flexibility to decide that," Green said.

To be sure, the firm's first effort Private Capital Fund I, is predominately focused on second lien and mezzanine investing, as well as stressed and distressed investing, while its second, FM Leveraged Capital Fund I, is geared towards first liens. And the firm is also a leader in low leverage CDOs, with Private Capital I directionally about four-to-one leveraged, with 20% equity in it, which compares to most CLOs in the market that are 10 or 12-to-one leveraged with 8% to 10% equity.

Though FM will not be ramping up another leveraged capital fund until the current one is fully invested, the firm's initial Private Capital fund is expected to be completely invested by spring 2007. This would open up the gates for future investments in the second lien and mezzanine market. "We would consider raising some more capital there but we have not made any decisions at this time." If and when the new fund is raised, the investment structure would mimic the first fund, with probably less leverage and more flexibility, Green said.

But for now, the firm does not have any immediate plans. "We are a little different than most managers," he said. "We tend to look at our ability to source deals and than make decisions about raising funds. This is opposed to raising funds and trying to find deals."

Move on down the road

Whether or not there will be funds to invest is another issue. Though all is well in the world of leveraged finance, there is the overhanging threat of a downward economic cycle. "It is like driving forward looking through your rearview mirror, you are looking behind you as a predictor for going forward," Green said.

One ominous threat to liquidity is the buyout sector's tremendous spending spree. "You are going to see more and more big deals being launched," Green said. "Big LBO guys are out trying to bite bigger fish." And if buyouts continue at their frenetic pace, investments in several more HCA-sized deals will represent a significant chunk of the high yield and institutional loan markets.

"The big LBO phenomenon in the credit markets is going to be the thing to watch for next year and whether or not it provides unreasonable concentration," Green said. With investments tied up in these mammoth debt packages, "if one deal goes bad there is the potential to lose a lot of money," Green said. "I query whether investors will continue to throw money out the door like they have to managers if that is where we are going."

Friedberg Milstein, based in New York, was founded in 2003 by Barry Friedberg, previously an executive vice president at Merrill Lynch, and Howard Milstein, co-chairman, president and CEO of The Emigrant Savings Bank. The firm manages over $1.5 billion in committed capital including first and second lien loans, mezzanine securities and preferred and common equity.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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