Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Direct lending firm hits $3 billion as investors pile in

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Amid still tight lending from traditional sources, direct lending is hot and Steve Czech is taking full advantage.

The hedge fund firm he runs, Czech Asset Management, has just closed its second fund to new capital after raising $1.5 billion, according to a person familiar with the situation.

Czech had originally sought $1 billion for the SJC Direct Lending Fund II but that was increased due to high demand. Investors—including public pensions in Michigan and South Carolina—asked to commit about $1.8 billion but were limited to the $1.5 billion maximum.

Direct- or asset-based lending funds attract multi-year capital commitments to make loans to mid-sized companies that are increasingly overlooked by banks because of stricter lending standards.

Hedge Funds Can Fill Bank Lending Shoes: Pro
Hedge Funds Can Fill Bank Lending Shoes: Pro

The opportunity has caused Highbridge Capital Management, Avenue Capital, BlueBay Asset Management and other large firms to move into the strategy, joining existing leaders such as Cerberus Capital Management and TCW Direct Lending (formerly part of Regiment Capital Advisors) .

Interest from investors has followed. U.S. pension funds have committed about $1.44 billion to direct lending strategies this year, according to data compiled by iiSEARCHES, a publication that tracks such allocations. That compares to $475 million for all of 2012.

(Read more: Not a bank, but still lending like one online)

Czech is the most successful money manager to emerge from the collapse of Morgan Stanley hedge fund unit FrontPoint Partners. The once-$11 billion firm closed in early 2012 after a health-care portfolio manager, Chip Skowron, was busted for insider trading and many investors pulled their money.

Czech's first fund raised $1.1 billion from clients while inside FrontPoint. The capital remained in place as the business spun off into an independent firm in December 2011.

Since inception in May 2010, the SJC Direct Lending Fund I produced a net annualized return of 11.5 percent—a total net return of 44.5 percent and gross return of 68.3 percent, according to an investor. The firm doesn't use leverage to boost returns.

By comparison, the S&P/LSTA U.S. Leveraged Loan 100 Index—a strategy benchmark—gained 18.9 percent total over the same period.

The new CAM offering will focus on leading manufacturing, transportation and distribution companies in North America and Europe, especially those that cater to other business as opposed to consumers, according to the investor.

Old Greenwich, Conn.-based CAM now manages about $3 billion overall. Czech declined to comment for this article.

(Read more: Private Equity to Fill Lending Gap?)

—By CNBC's Lawrence Delevingne. Follow him on Twitter @ldelevingne.


This story has been updated to correct the name of Regiment Capital Advisors; the firm's Special Situations Funds group was bought by The TCW Group in January 2013.