Jeff McDermott has become one of the founding partners of Stony Lane Partners, a new private equity firm that will acquire and turn around distressed industrial businesses.

Today was McDermott's last day at UBS, where he co-headed investment banking with New York-based Rick Leaman and London-based Alex Wilmot-Sitwell since November 2005. McDermott had previously spent a year running investment banking for Europe, the Middle East and Africa with Wilmot-Sitwell. He joined UBS in 2001 from Morgan Stanley in order to run industrials-sector investment banking.

McDermott and his 10-person team in New York are being seeded by Michael Heisley, a turnaround expert who is listed on the Forbes 400. Heisley’s company, Heico, has 9,000 employees and $2bn (€1.4bn) in revenue. McDermott and Heisley first met 18 years ago in Beverly Hills, California, where McDermott was a banker with Drexel Burnham Lambert and Heisley was buying up distressed and bankrupt manufacturing companies.

Stony Lane will work closely with Heisley to revamp the businesses of troubled companies, McDermott said. He said: “We’re going to look for companies where the problems are caused not just by capital structure issues, but also operational issues. We're going to turn around those operations.”

McDermott declined to comment on how much Stony Lane has alloted for investment, and whether it will take money from outside investors.

He also noted that widespread fears of a credit crunch -- based on tightening spreads in recent weeks -- are well-founded.

McDermott told Financial News he believed the coming credit crunch would be similar to the problems that have developed in the sub-prime mortgage sector.

McDermott said: “I think a credit crunch will play out over time, and it will be like a slow rolling wave. It’s won’t be a one-day cataclysmic event. I think there will be double leverage in the system. I think CDOs are buying margin leverage and are buying corporate credits, which are priced like there’s no end to economic growth in the future. Of course, there are economic cycles.”

There are mounting concerns about a crisis in the credit markets, based on pervasive issues with hedge funds exposed to sub-prime debt and growing leverage levels among all types of companies. Earlier this week, Goldman Sachs CEO Lloyd Blankfein said the biggest potential woe facing the markets would be a credit crisis.

Robert McAdie, Global Head of Credit Strategy at Barclays, wrote in a research report yesterday that he expects future closures. He said: “We believe that additional weakness in the credit markets over the next few weeks is inevitable, on the back of sub-prime-related liquidations by hedge funds and further hedge fund closures.”

Cerberus Capital Management recently raised $10.5bn through four funds in order to target distressed companies in specific sectors. Centerline Capital Group, a real estate finance company, is setting up a fund to invest in distressed debt on commercial property in a move to capitalize on an expected upturn in companies defaulting on property loans.

Late last year there was a flurry of investment in bankruptcy and restructuring advisers. Boutique Perella Weinberg started a restructuring effort, while US financial advisory boutique Duff & Phelps bought Chanin Capital Partners, a 22-year-old firm whose main business is advising creditors in distressed companies. Last August, US private equity firm Hellman & Friedman took an $800m stake in turnaround advisory firm AlixPartners and fund group Amvescap agreed to pay up to $300m to acquire distressed investing specialist WL Ross.