Bigger is better for buyout fund-raisers in 06

First quarter fund-raising in the buyout sector ended with a bang. Actually, it was more like it ended with a Bain, as in Bain Capital. The firm put together two funds in the quiarter totaling $10 billion – an $8 billion ninth fund and a $2 billion co-investment fund.

The Bain funds brought the total for the first quarter close to what last year’s first quarter looked like, at about $35 billion.

What Bain achieved is representative of what will likely be a rash of enormous funds to close in 2006. The Blackstone Group took on the role of bellwether last year when it raised more than $12.5 billion, and the firm is expected to close on about $13.5 billion shortly.

Not to be outdone, others such as Texas Pacific Group (TPG) and Bain Capital have pushed up their targets during the first quarter.

Alan Holt, co-head of U.S. buyouts for The Carlyle Group, captured the atmosphere in private equity at a conference last month when he said, “Our fund for U.S. buyouts was $7.8 billion, which was probably the largest U.S. buyout fund for about three minutes.”

To give credit where credit is due, the first completely closed $10 billion-plus fund was that of Apollo Management, which did so early on in the first quarter, closing on $10.1 billion for fund VI. Other targets out there now are Blackstone Capital Partners V’s $13.5 billion, KKR Millenium II’s $10 billion and TPG’s Fund V, which is now targeting $14 billion.

In the first quarter, Buyouts (a sister publication of PE Week) tracked $32.8 billion in buyout funds raised by U.S.-based firms, $1.96 billion in mezzanine and $533 million in funds-of-funds. That matches the pace of last year’s first quarter total of $35 billion of mezz and buyout funds raised.

The numbers are on pace to match last year’s buyout and mezzanine yearly total of $182 billion.

Big funds besides Apollo and Bain that closed included Vestar’s Vestar V, with $3.7 billion, and Clayton Dubilier & Rice’s $4 billion fund.

As for numbers of actual funds, Buyouts tracked more than 190 of them raised by U.S. firms.

In Europe, meanwhile, the trend is the same-the bigger the better. U.K.-based Permira is raising the largest ever fund outside the United States $10.4 billion. It’s also the first non-U.S. fund worth more than $10 billion.

Richard Ansbacher, a partner with Fried, Frank, Harris, Shriver & Jacobson, which advises private equity groups, says, “We’ve just gone through a big cycle of follow-on funds. In the remainder of the year I don’t see any slowing. Investors are trying to hold slots and prevent scale backs.”

Funds are also coming back quicker to the market. Their hold periods have shortened, so in some cases they are still hitting investment thresholds of 70% to 80%, but are putting money out quicker and exiting businesses faster.”

Bain, for example, raised its last fund in 2004, and was back in the market two years later. Naturally, this has created a time crunch for LPs.

“A lot of investors are buried with re-ups at the moment so it is difficult to get time with them to look at new things,” says Kelly DePonte, partner at placement agent Probitas Partners. “That may change later in the year as these more established funds clear the market.”

Emerging markets, meanwhile, proved attractive to LPs once again. One manager at an Asian fund noted, “We’re actually getting unsolicited interest.” TPG’s Newbridge IV raised $1.5 billion in the first quarter. Carlyle is currently raising its third Asia fund, with a target of $250 million, which is close to closing.

The consensus hot areas seem to be India, China and Central Europe.