Newly established Pangaea Capital is in the process of raising a targeted $1.5 billion for an Asian distressed investment fund. A unique feature of the new fund is that it will source 80% of its capital from leading Asian financial institutions in an innovate structure that allows its Asian institutional investors the right to co-invest alongside the fund in its transactions.

According to Pangaea's founder Robert Zulkoski, the fund's high caliber Asian investor base serves as a key strength in a market place that increasingly favors local over foreign investors.

"The market environment in Asia is entering a new paradigm," he says. "Local investors are returning to the distressed market, and their funds are being run by people who used to work with us.

"Xenophobia is also starting to return and it's becoming evident that local bidders will receive better deals than foreign ones going forwards," he adds. "In this environment, it became clear to me we needed to create a platform that would be considered a local solution rather than a foreign vulture."

Pangaea, headquartered in Singapore is staffed with a team of ex-Colony investment professionals, led by Zulkoski, previously head of Colony's Asian business.

The firm counts John Mack, ex-Morgan Stanley and Credit Suisse CEO and Arthur Samberg, founder of multi-billion dollar US hedge fund Pequot Capital amongst its advisors.

Pangaea will raise its capital through three pooled funds. Some 20% will come from the Pangaea Special Investor Fund, which will only be open to Asian financial institutions or intermediaries. Minimum investment for each institution is $25 million, with a maximum investment $50 million.

"We wanted to ensure investors committed significant enough capital to the fund to align their interests with the fund. The maximum cap ensures that no one investor can dominate," explains Zulkoski.

Zulkoski notes that the fund has attracted investments from leading Asian financial institutions from each of the major markets in the region. Unique to Pangaea's structure is that each of these Asian investors will also have an opportunity to be a strategic partner. On any given transactions, these investors will have co-investment rights enabling them to invest alongside Pangaea through a third fund. Some 60% of the capital is expected to be raised through this route.

Zulkoski explains that this is an attractive prospect for his Asian investors. "Most Asian financial institutions have excess cash on their balance sheets and are looking to put this to work. In a situation where they're facing margin compression they realize they need to diversify their portfolio away from basic lending. The co-investment approach gives them an opportunity to invest alongside the fund at discounted fee rates, and also allows them to create feeder funds, which they can white label and sell on to their private banking clients."

Zulkoski adds that this network of strategic allies across the region will augment the team's access to deal flow.

Taiwan's Chinatrust Bank is one of the institutions investing in Pangaea. Zulkoski was unable to disclose the identity of the other Asian investors though he says that several have committed capital.

Another 20% of the capital will be raised through the Pequot Pangaea Fund. This fund is a joint venture with US-hedge fund Pequot Capital, and will raise funds from foreign institutional investors, including pension funds and endowments. While these investors will have the same investment terms as the Asian institutions, they will not enjoy co-investment rights.

Zulkoski says he expects Pangaea's first close in early third quarter of 2005. "Fund raising has reached the point where we have started working on our investments," he comments.

The $1.5 billion in total equity capital raised, will allow the levered fund to invest in $4 billion at the deal level. The fund is expected to enjoy an IRR in excess of 20%.

Currently Pangaea counts 12 members in its team, but is targeting a headcount of 35 by year-end. The firm has offices around Asia including Tokyo, Seoul and Shanghai, as well as an office in New York.

Zulkoski says his long-term vision is to establish Pangaea as the preeminent Asian centric alternative investment management platform, and expects to include complimentary strategies within the Pangaea umbrella in the future.