PaineWebber Teams Up With Sterling for LBO Fund –

In its foray into merchant banking on a dedicated basis, PaineWebber is quietly teaming up with an outside private equity group, Westport, Conn.-based Sterling Ventures Ltd., to raise a private equity fund that will have a target of at least $400 million.

The proposed joint venture has not yet been finalized, according to sources familiar with the situation. However, if all goes as planned, the arrangement could be announced as early as next week.

The principal operation, to be called PaineWebber Sterling Capital Partners, will focus on investing in general industrial, consumer products and business services companies with enterprise values between $100 million and $350 million and revenue of as much as $250 million, according to people familiar with the fund raising. PaineWebber may put as much as $100 million of its own capital into the fund, with the remainder coming from PaineWebber employees and outside investors.

The new operation will be overseen by Sterling General Partners Douglas Newhouse and William Seldon, and PaineWebber’s Charles Santoro, who has been heading the industrial and financial buyers banking groups at the firm. The new group is expected to report to Brian Barefoot, head of investment banking at PaineWebber.

Officials at PaineWebber and Sterling Ventures declined comment.

As a firm, PaineWebber previously has taken minority stakes, but these typically have been anomalies-such as the 25% stake in Iowa Internet software developer Kingland Systems Corp. announced last week.

Sterling, a boutique founded seven years ago by former Lehman Bros. executives Messrs. Newhouse and Seldon, invests mainly in manufacturers of industrial or consumer products such as American Buildings Co. and Aavid Thermal Technologies.

Sterling looks to invest in companies with revenue between $50 million and $500 million. Until now, the firm has raised money for its investments on a deal-by-deal basis.

PaineWebber intends to leverage its reputation as a middle-market bank to help source deals for the new unit. In many ways, the private equity operation would be a natural extension of the firm’s banking franchise, which often caters to pre-initial public offering companies that are looking to grow either through acquisition or internally but might not have access to the public capital markets.