Cabot Square Eyeing Daiwa Principal Assets –

Unconfirmed reports suggest Cabot Square Capital, an independent London-based principal finance house, is in exclusive negotiations to acquire Daiwa’s principal finance arm. The deal is expected to be completed in the first half of this year.

Daiwa put the unit, which has a portfolio of assets valued at approximately GBP400 million ($649.2 million), up for sale in February.

Cabot Square Capital-which was established in 1996 by John Van Deventer, formerly of Goldman, Sachs & Co., and John Clark, previously with Lehman Brothers-manages and advises funds focusing on three main areas: principal finance and private equity; corporate restructurings and distressed debt; and European high-yield bonds. Credit Suisse First Boston (CSFB) is Cabot Square Capital’s core investor.

The group, which has deliberately maintained a low profile, has built a portfolio of hotel, leisure, pub and engineering investments with a cost value of approximately $500 million. The acquisition of the Daiwa portfolio would greatly develop Cabot Square Capital’s business.

Investment director Matthew Hudson, who joined Cabot Square Capital from law firm SJ Berwin last autumn, declined to confirm or deny the firm is in talks with Daiwa. He did, however, provide details on Cabot Square Capital’s current fund-raising effort.

New Fund Offers Varied Approach

The firm now is raising Cabot Square Capital Partners II L.P., which Mr. Hudson described as “a mid-sized European private equity fund targeting investments that fall within principal finance criteria.” In other words, businesses with strong cash flows and tangible assets like those in Cabot Square’s existing portfolio.

Cabot Square Capital anticipates holding a first closing on the fund in the next few months, although the vehicle’s target size has yet to be finalized. The firm currently is subject to conflicting pressures from potential investors, “some of whom would like to keep the fund small and neat, while others would prefer a vehicle that could absorb more substantial commitments,” Mr. Hudson said.

Cabot Square Capital Partners II is being marketed principally to European and U.S. institutions, but the firm also has spoken to one or two potential investors elsewhere in the world, Mr. Hudson said.

The existence of an investor constituency that would like to make larger commitments than Cabot Square Capital’s original target could accommodate is “a nice problem to have,” Mr. Hudson said. It may also reflect the scarcity of independent principal finance groups in the European area, which is dominated by captives such as Nomura, Nikko, Goldman Sachs and Daiwa.

Thanks to its close relationship with CSFB, its largest investor, Cabot Square Capital has strong access to capital independent of its limited partnerships.

Although Cabot Square Capital shares London premises with CSFB and therefore benefits from all the back-up resources of a large bank, as well as from CSFB capital, the firm is independently owned, managed and run, and CSFB is not represented on Cabot Square’s investment committee.

If Cabot Square is indeed a contender to acquire the Daiwa principal finance portfolio, it is likely the transaction would be funded largely with CSFB capital rather than via the new vehicle.