Buyout Fund Numbers Inflate

U.S.-based buyout firms have raised more than $100 billion during the first three quarters of 2005, adding to what already has been a record-breaking year.

For the nine-month period, 204 funds secured $103.9 billion from LPs, surpassing the previous high-water mark of $65.4 billion raised by 127 funds in all of 2004, according to data compiled by Buyouts (a news publication owned by Thomson Venture Economics, publisher of PE Week).

In fact, by year’s end, 2005 might actually double the 2004 tally, given that there are nearly 300 buyout funds currently looking for capital commitments.

The year-to-date figures include 73 funds that have held final closes, including 15 third quarter finales from such firms as Warburg Pincus ($8 billion), Tenaska Capital Management ($838 million), KRG Capital ($715 million), Audax Group ($700 million) and Wind Point Partners ($700 million).

Also, 131 funds have held interim closes, such as Apollo Management ($4.9 billion of $10 billion), Welsh, Carson, Anderson & Stowe ($1.5 billion of $3.5 billion) and Clayton, Dubilier & Rice ($1.45 billion of $3.5 billion).

Buyouts is tracking 123 firms in market with new “uncommitted” funds, including giant offerings from The Blackstone Group ($12.5 billion target), Thomas H. Lee Partners ($7.5 billion), Madison Dearborn Partners ($5 billion) and Vestar Capital Partners ($3.5 billion).

Blackstone is expected to hold a first close this month, but also plans to join TH Lee, Madison Dearborn and Apollo in holding final closes in the first half of next year. All firms that head into 2006 likely will have to compete with an $8 billion-plus offering from Kohlberg, Kravis, Roberts & Co., an independent fund managed by the late-stage/buyouts team of JPMorgan Partners. There are also possible multi-billion-dollar fund-raising efforts coming from Texas Pacific Group and GTCR-Golder Rauner.

Considering this hefty amount of buyouts fund-raising, it seems necessary to ask what is driving the volume? Is it reasonable? And what will its repercussions on the private markets at large?

The Driver

For the past 18 months, the buyouts fund-raising market has been powered by an over-abundance of supply and demand.

The supply is from LPs, who have steadily raised their collective alternative investment allocation since the economic downturn reversed course. Part of the rationale is that the private markets have slightly outperformed most public indices over the past couple of years, thus precluding many endowments, foundations and retirement system administrators from really opening up the stock spigot.

Also, the LP universe has expanded, with regulatory changes opening up new sources of corporate and governmental capital from Europe and parts of Asia.

Demand, or buyout deal-making, is also rising to new heights. Not only are more deals getting done, but deal sizes are rising thanks to a surge in club deals, favorable debt markets and large fund sizes. The second largest LBO in history is currently pending, thanks to Ford Motor Co.’s decision to sell Hertz Corp.


It is one thing to understand why fund-raising is up, but another to suggest that the increase is justified from a return-on-investment perspective. There are some who argue that the LBO market is a growing bubble just begging to be popped.

When justifying the totals, consider that it’s the mega-funds that are feeding the tally, as only 11% of 2005 LBO fund-raisers have raised more than $1 billion. But that group accounts for 63% of overall fund-raising. The knock on mega-funds has always been that they are too efficient to produce desirable returns, but it simply hasn’t been borne out in recent years.

Blackstone Group’s current fund, for example, has a net IRR of about 71 percent. Small-market buyouts technically have higher average IRRs than do mega-market funds, but the difference in fund size-and the corresponding real dollar returns-obliterates the small-market advantage.


One byproduct of the buyout fund-raising boom is that many LPs have been forced to increase their exposure to mega-buyouts, at the expense of lower-market buyouts, mezzanine or VC. Official allocations may not have changed, but any meaningful commitment to Warburg Pincus (at least 5% of fund capital) could equal nearly a dozen VC or small-market buyout fund commitments.

Most LPs continue to aim for diversification, but several have said that it is becoming increasingly difficult. “Mega-funds might not keep producing incredible returns and it’s important to diversify your fund portfolio, but it’s not like mega-funds will get completely washed out,” says John Morris, a managing director with HarbourVest Partners.

Morris acknowledges, however, that the mega-LBO market could be nearing its peak, although he says that there is no way of knowing whether it is already there or whether is still a year or two away.

Meanwhile, venture fund-raising continues to do fine thanks to decreased fund sizes, but there could be a lag that affects such firms the next time around.

Some LPs suggest that the mega-market bias has impacted the mid-sized buyout fund-raising market, which already is considered to be saturated. Plenty of firms still are getting funded, but often not from top-tier investors.

Instead, they often are backed by LPs unable to access the Blackstones or Carlyle Groups of the world.

This story previously appeared in Buyouts, a related publication.