Even popular buyout funds are making concessions to investors as they struggle to raise fresh money in a crowded market.
Consider Berkshire Partners, the Boston buyout shop that announced July 20 that it had closed Berkshire Fund VIII at $4.5 billion, well ahead of its $4 billion target, in a fundraising campaign that took only months. Sister Web site peHub attributed much of Berkshire’s success to its superior performance.
The firm’s last pool, the $3.1 billion, 2006-vintage Berkshire Fund VII LP, has a net IRR of 6.9 percent, while Fund VI, which collected $1.7 billion in 2002, sports a net IRR of 23.9 percent, according to Dec. 31 data from the California Public Employees’ Retirement System.
But even with all that, Berkshire is yielding—if only a little—to investor demands. As peHub also noted, Fund VIII will have a “tiered carry structure” that allows it to receive a premium 25 percent carried interest if it hits a certain benchmark. By comparison, Berkshire’s Fund VII had a flat 25 percent carry. To attain the premium 25 percent, Fund VIII must perform in the top quartile of the private equity industry, a source said.
Providence Equity Partners is another firm becoming more conciliatory with its terms in order to attract investors to its new fund, Providence Equity Partners VII LP. According to Dow Jones Private Equity Analyst, the firm is offering a lower management fee for investors that commit $500 million or more. In addition, Providence has yielded to another frequent LP demand, allowing a transaction fee offset of 100 percent.
In another indication of how difficult the market is, Providence has reduced its target for Fund VII, as other firms also are doing. The firm had an informal target of $8 billion but later decided to target $6 billion, Private Equity Analyst reported. By contrast, its previous fund, the 2007-vintage Providence Equity Partners VI LP, raised $12.1 billion.
The phenomenon also is extending overseas. The British firm Cinven Group will offer a 5 percent discount on management fees to LPs who participate in the first close of its fifth fund, a pan-European buyout fund that officially came to market in July with a target of €5 billion ($7.07 billion), according to Dow Jones LBO Wire.
Likewise, EQT Partners is offering a 10 percent “early bird” discount on its 1.5 percent management fee for its planned €4.25 EQT VI, according to the Financial Times. At that size, the fund would match the firm’s 2006-vintage EQT V at €4.25 billion. Fundraising has been successful, though, and the Swedish firm is considering raising its target to €4.75 billion, the newspaper said.