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MHR closes third distressed fund on $3.5bn

A $3.5 billion distressed-for-control fund was recently closed by MHR Fund Management, the New York firm led by Carl Icahn’s former chief investment advisor Mark Rachesky. It is more than three times the size of the firm’s 2002 fund.

Special situations and distressed investment firm MHR Fund Management has more than tripled the size of its previous fund with the $3.5 billion (€2.5 billion) close of its third distressed-for-control fund, an industry source confirmed.

The firm’s previous fund closed on $856 million in 2002, with commitments from limited partners including the California Public Employees’ Retirement System. That fund had a gross annualized IRR of 60.3 percent, according to March 2006 minutes from a Rhode Island State Investment Commission meeting.

MHR Institutional Partners III held its first close in fall 2006. According to the March 2006 meeting minutes from the Rhode Island State Investment Commission, which voted to invest $20 million in the fund, Fund III’s target was $2 billion and had a hard cap of $2.5 billion. MHR declined to comment.

It is possible current market conditions encouraged the firm to change the fund’s target size, as MHR told the Rhode Island pension it “believes that the market environment for distressed investing is expected to improve due to dramatic deterioration of credit standards over the last few years”.

The fund’s mandate is to invest in distressed middle market companies in the satellite, communications, media, energy and biotech industries, according to the minutes, which said the fund expected to invest in approximately 20 companies.

MHR’s first fund closed on $217 million in 1998. The New York firm was founded by Mark Rachesky, formerly Carl Icahn’s chief investment advisor.