Deals like Accuride Are the Future of Sun Capital Securities

Sun Capital has a $1.1 billion* hedge fund called Sun Capital Securities. Its stated strategy had been to take non-controlling equity stakes in public companies.

To date, the fund has basically been a zero.

But even though it’s fully invested, the firm isn’t content to passively plod along. Rather, Sun has revamped the fund into a distressed debt investor. The majority of the firm’s recent round of 23 layoffs were a result of this shift, a person close to the firm said. (Eight more were performance-related.)

But that presents a bit of a conundrum for the existing portfolio, which includes minority investments such companies as Berkline BenchCraft Holdings and Souper Salad. This week Sun showed us one way to resolve that conflict with its stake in auto parts maker Accuride. In exchange for subordinating the $70 million in the Accuride debt owned by Sun Capital, the company increased Sun’s stake to 25% of the OTC-traded company’s fully-diluted common stock. That’s up from the 9.9% it owned before. Further, Sun Capital gets five board seats and the ability to appoint a sixth board member in a 12-person board. Accuride had revenues greater than $1 billion in 2007 and 2006.

Expect to see more creative deals like Accuride from the newly revamped Sun Capital Securities. Another option for some of these holdings is to purchase the entire company outright. According to a person close to the firm, that option is “under review” for all of the remaining holdings.

Sun Capital Securities bears no relation to Sun Capital’s regular turnaround funds. Its latest fund, Sun Capital Partners V LP, is a $6 billion fund raised in 2007. It was oversubscribed by $2 billion and is 25% invested.

*The fund has a two-year lock-up period.