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LBO France to raise debut credit fund

Fresh from raising nearly €1bn for its eighth mid-cap fund, the French private equity firm is aligning itself to take advantage of market dislocation. It is also raising its third small-cap fund.

LBO France is poised to raise the country’s first credit-focused private equity fund, having already hired a dedicated trio of executives to launch the investment strategy.

It continues a trend set in motion by many US and UK mega-firms, which have sought to capitalise on debt opportunities rising from global financial dislocation. Credit-focused and distressed debt funds are now being considered by many French firms, according to a Paris-based fund formation lawyer.

LBO France will begin marketing its credit fund in May, according to sources familiar with its plans. The sources did not disclose the fund’s target size and LBO France declined to comment.

The fund’s strategy will centre on buying discounted debt that it will hold until maturity in stable French mid-market companies that have been part of a leveraged buyout. In contrast to some private equity groups that have launched credit funds, such as Providence Equity Partners and TPG, LBO France will not be able to buy debt associated with companies in which its other funds are invested.

The credit strategy adds a fourth branch to the firm’s business lines, which include real estate, small-cap private equity and mid-cap private equity.

LBO France in December held a final close on “nearly €1 billion” for its eighth mid-cap fund, which had been targeting €1.2 billion, according to documents from several US public pensions. The fund’s buying power will likely be greater than the final close reflects, given the firm’s historic co-investment levels of approximately €2 of co-investment coming from LPs for every €1 invested by the fund.

Dubbed “White Knight VIII”, the fund had been in the market for roughly a year and received re-ups from all the firm’s limited partners, including US public pension the New York State Common Retirement Fund and French fund of funds Credit Agricole Asset Management. New investors included the Qatar Investment Authority and the Los Angeles Fire and Police Pension fund.

White Knight VIII invests in French companies with enterprise values between €100 million and €2 billion. It is roughly 30 percent invested in power conversion company Converteam, storage systems company Averys and biscuit maker Poult.

Last week, LBO France exited train seat manufacturer Compin in a secondary sale to Barclays Private Equity. Compin had annual sales of roughly €50 million when LBO France first invested in it in 2005 and annual sales of close to €130 million when it was sold.

Compin was a portfolio company of the firm’s small-cap Hexagone I and II funds. Hexagone II, which closed on €150 million in 2006, is approximately two deals away from being fully invested and LBO France is currently raising its successor, as first reported by PEO in October 2008.

The firm’s seventh mid-cap fund closed on €640 million in 2006. Closure of White Knight VIII brings the firm’s capital under management to €3.5 billion.