"These (casino) buildings are already well-located, and cash flow is positive," said Clare Murphy, executive director of the San Francisco system.
"From everything I've read, it's a win/win for investment banking as well as Trump … and they (DLJ Merchant Banking Partners III) have an outstanding track record," said Nicholas Maiale, chairman of the board of Pennsylvania employees' fund.
Distressed investment opportunities have been on the rise, Mr. Maiale said. The Pennsylvania fund has 11.7% of total assets committed to private equity funds, most of which are in distressed or opportunistic investments. Distressed investments make up 10% of the fund's 12.5% private equity target; that target is set to increase to 14% of assets by Dec. 31, 2008.
The Trump deal is an example of the less traditional investments private equity general partners are making since the technology bubble burst.
"Many, especially large, buyout funds are looking at deals and deal structures they never would have looked at in the past," said Christopher J. Caputo, managing director and founder of Fortress Group Inc., a New York placement agent for private equity investments. It's because there is more money chasing deals, he said, but the "jury is still out" as to whether this is a positive development for limited partners.
"Limited partners are concerned because they do not necessarily invest with CSFB to do distressed deals. They have other managers for that," Mr. Caputo said. The firm usually invests in leveraged buyouts and acquisitions. "But CSFB has some smart guys," and limited partners are "cautiously optimistic" that broadening the investment mandate will result in superior fund returns, he said.
"We categorize it as a special situation designed to take advantage of financial assets and deal with the financial aspects of these assets," San Francisco's Ms. Murphy said. "It fits within the mandate."
Even if the Trump deal is more of a distressed debt deal than is a typical LBO, the DLJ fund is not taking a large risk, said Victoria Harmon, spokeswoman for Credit Suisse First Boston, New York. The investment is well within the mandate of the fund, which is now more than 70% invested, she said, adding institutional investors committed close to 90% of the fund's assets.
"Through the fund's life, opportunity investing and distressed investing has always been in line with our mandate, and our investors and limited partners have always been fully aware that our mandate has the potential for distressed investments," Ms. Harmon said.
"Though not standard LBO fare, these restructuring deals are not that unusual for buyout firms, and certain firms like KPS Special Situations (Funds LP) and W.L. Ross (& Co.) specialize in them," said Kelly DePonte, partner at San Francisco-based Probitas Partners, a San Francisco private equity placement agent.