Bear Stearns launches its third fund

Bear Stearns Merchant Banking has set a $1.75bn target for Fund III, a seemingly modest goal considering its stellar track record.

New York-based Bear Stearns Merchant Banking is in the market with a new fund, looking to raise as much as $1.75 billion, according to Form D filings with the Securities & Exchange Commission.

The fund, Bear Stearns Merchant Banking Partners III, LP, comes to market four years after its predecessor, the $1.5 billion Fund II.

Considering the performance of Bear Stearns’ previous efforts, raising Fund III should not prove difficult. The firm’s 1997 fund, its first, has returned 5.3 times its invested capital, according to its Web site, while its follow-up fund, Fund II, has scored a number of notable homeruns, such as investments in clothing retailer New York & Co., ice distributor Reddy Ice, personal protection maker Aearo Corp. and CamelBak, a manufacturer of portable hydration backpacks.

Bear Stearns is headed by senior managing directors John Howard, Bodil Arlander, Gwyneth Ketterer, David King, Douglas Korn and Richard Perkal.

The firm frequently relies on partnerships as part of its investment strategy, and has established strategic agreements with the Milan-based Opera (to invest in Italian lifestyle companies) and New York-based Giuliani Partners (to target the security sector). Meanwhile, two years ago, Bear Stearns also lured former TD Capital managing director Paul Lattanzio to serve as a senior managing director and head its small-market arm, Bear Growth Capital Partners.

Recent Bear Stearns investments include printing and packaging outfit Packaging Holdings Inc., gourmet grocer Sutton Place Group, and a minority position in women’s shoe and bag manufacturer Stuart Weitzman Holdings.

According to the SEC filing, Credit Suisse First Boston has been hired as a placement agent to help raise the fund, and the firm is accepting minimum investments of $20 million.

The fundraising comes at a time when a number of Bear Stearns’ captive peers have been pushed away by their investment banking parents. JPMorgan Partners was the latest to go, while private equity divisions at banks such as Credit Suisse First Boston, Morgan Stanley, Deutsche Bank, and others, have all either been booted out or forced to reshuffle their strategy. The overriding concern and leading cause for separation is that the in-house private equity groups can sometimes step on the toes of the investment banks’ best customers, those being other private equity groups.

Bear Stearns, however, avoids such conflicts since it devotes its attention to the middle market, and won’t likely find itself in a runoff against the likes of a The Blackstone Group or Kohlberg Kravis Roberts.

Bear Stearns targets investments with enterprise value ranges of between $100 million and $1 billion, a cap that keeps the firm off the large market radar.

However, that self imposed limit also probably means the firm won’t look to raise too much more than the $1.75 billion specified in the filing, despite a record that could likely fetch much more in limited partner commitments.