A Tale Of Two Mega-Funds

Even the big boys are feeling the pinch.

The latest word on fundraising plans of The Blackstone Group and Kohlberg Kravis Roberts & Co., arguably the two most recognized names in the buyout business, echoes the slow going being experienced by the rest of the market.

First there’s the news that KKR is holding off raising its next North American buyouts fund until 2010, a decision reported by peHUB.com, the sister Web site of Buyouts. The fund was originally expected to begin marketing in the first half of 2008.

The rationale behind the decision is straightforward. There’s the dilemma currently facing every shop on the fundraising trail as many limited partners, especially public pension funds and university endowments, have settled into a holding pattern for 2009, waiting for the impact of the denominator effect to subside and the exit market to pick up and deliver some much-needed liquidity.

Drilling down on KKR itself, when it comes to what strategies LPs are actually committing to these days, traditional large-market buyouts are at the bottom of the list. Throw in the fact that, according to the report, KKR still has more than $5 billion in dry powder left from KKR 2006 Fund Private Investors, the vintage 2006 $17.6 billion pool it wrapped in March 2008, and it’s hard to characterize the postponement as much of a setback.

KKR has also been fairly busy of late as well, taking steps toward completing its merger with Euronext-listed KKR Private Equity Investors, a combination that is expected to set the stage for an initial public offering on the New York Stock Exchange sometime next year. The firm has also continued to make deals, most recently its participation in a joint venture with Bertelsmann AG to develop a global music rights management business.

Meantime, peHUB.com was also able to shed some light on the status of Blackstone’s sixth global buyout fund, courtesy its access to confidential materials distributed at the company’s annual meeting in mid-May. According to the documents, the firm told investors it had roughly $8.6 billion in commitments for Blackstone Capital Partners VI. That figure includes a $500 million slug from Blackstone itself and is in line with the latest data from Thomson Reuters, the publisher of Buyouts, which lists a June closing on a total of $1.45 billion in pledges as the latest activity for the fund.

The current pace of fundraising for Fund VI is a far cry from that set when Blackstone came charging out of the gate with a first close on $7.1 billion in commitments in September 2008, coincidentally the same month that Lehman Brothers’s bankruptcy sent shockwaves through the global financial system, prompting a severe sell-off in the public markets.

The original target for the vintage 2008 fund was $20 billion but the firm has reportedly lowered expectations to $15 billion. Its prior fund, Blackstone Capital Partners V, closed in September 2007 with a total of $21.7 billion in pledges.

The documents obtained by peHUB.com also indicated Blackstone still had $6 billion of dry powder left in Fund V at the time, and that it expects to begin investing from Fund VI in the first half of 2010. The firm has already earmarked between $1.5 billion and $2 billion from Fund VI to be used for debt repurchases.

Blackstone’s most recent official fundraising activity was its late June closing of a European real estate investment fund. The firm secured more than 3.1 billion euros ($4.4 billion) for Blackstone Real Estate Partners Europe III, exceeding a target of 2.5 billion euros.