5 Questions for Larry Schloss

Diamond Castle Holdings today announced that it has closed its inaugural fund with $1.825 billion in capital commitments. The New York-based firm was founded in late 2004 by former CSFB/DLJ Merchant Banking pros, including group head Larry Schloss. Larry now serves as chairman and CEO of Diamond Castle, and this morning answered 5 Questions for peHUB.com:

1. You’ve already committed around 40% of the fund. I hate to ask this on the day you announce the close of Fund I, but how soon do you need to begin raising Fund II?

You’re right, we’re not going to have that big of a breather. You can’t really time investments and certainly don’t want to force anything… but our deal-flow is terrific and I’d assume that, if it keeps up, we’ll invest another $700 million in 2007 and be back in market in 2008.

2. Is it fair to say that you either avoid clubs, or at least like to be the clear lead investor?

Yes. We like to be the lead, and bring in our LPs as co-investors. You won’t see us in the mega-deals because of our size… What we are is a middle-market buyout firm very focused on certain sectors: Energy, power, financial services, media, telecom and healthcare.

3. What was your basic sales pitch while raising the fund?

I started the private equity business of DLJ back in 1985, first with direct investing on the firm’s balance sheet. Next came a $1 billion LBO, a $3 billion LBO fund and then a $5.4 billion multinational fund that was the world’s largest fund for two weeks. I also built out the group to include other alternative asset classes, like mezzanine and real estate. I ran then entire business when DLJ got acquired by CSFB, and it was the world’s largest manager of private equity when I left.

But it was time to start something new, so we started Diamond Castle with about half of the managing directors who’d been in the $5.4 billion fund. Some of us have been working together since the 1980s, and our track record is very clear… when people sorted through all of the old DLJ deals, it was very clear which ones were done by me and my partners.

4. Speaking of your past employer, are you surprised that DLJ Merchant Banking is still a viable LBO effort

No comment on DLJ Merchant Bank.

5. Ok, let me try a different tact: When you left to form Diamond Castle, lots of I-banks were spinning off their private equity groups – in part due to the conflicts-of-interest cited by your partner Mike Ranger in a WSJ article at the time. Are you surprised that many of those I-banks are now bringing PE back into the fold?

No, it’s a cyclical business. When it’s a good time in the cycle – which it is right now – it’s a good way to make money. Plus, deal-flow is great inside the I-banks, so it’s a really nice time for them right now… I can’t predict how they’d manage [the market going south]. It will be up to them…No comment on DLJ Merchant Bank.No, it’s a cyclical business. When it’s a good time in the cycle – which it is right now – it’s a good way to make money. Plus, deal-flow is great inside the I-banks, so it’s a really nice time for them right now… I can’t predict how they’d manage [the market going south]. It will be up to them…