Buyout fund-raising soars to record highs in ’07

Giant leveraged buyouts, the carried interest tax debate, the Blackstone Group IPO, and a mid-year credit crunch stole the business-press headlines in 2007. But another monster year of fund-raising ensures that LBO firms will stay in the news in 2008 and beyond.

U.S.-based buyout firms raised $276.7 billion in commitments from limited partners in 2007, smashing the previous year’s total—itself a record—of $225.6 billion raised, based on research from Buyouts, an affiliated publication to PE Week.

Though not all firms that raised funds last year have known targets, once again, it was the mega-funds that raised the lion’s share of the total. U.S.-based Buyout funds with targets above $5 billion convinced LPs to commit $135.1 billion last year, nearly half of the total. Funds with targets of between $1 billion and $5 billion raised more than $89 billion in commitments.

Among the highlights:

• Blackstone closed the largest buyout fund of all time at $21.7 billion. At least one placement agent observed that the event, taking place at about the same time as its summer IPO, could mark the peak of the LBO market. “It was almost as if Steve Schwartzman had a crystal ball,” said Kelly DePonte, a partner with San Francisco-based placement agent Probitas Partners. Blackstone is expected in the market shortly with its next fund, targeting between $15 billion and $25 billion.

GS Capital Partners, the New York-based buyout arm of Goldman Sachs, kept its momentum a year after closing massive mezzanine and infrastructure funds. It closed its latest global buyout fund, Goldman Sachs Capital Partners VI, at $20 billion, which for a short time held the title of largest buyout fund ever raised.

Sun Capital Partners, a Boca Raton, Fla.-based shop with a penchant for turnaround investing, raised a fund early in the year, amassing $6 billion, exceeding a $4 billion target. Providence Equity Partners, the Providence, R.I.-based communications, media and entertainment shop, did likewise, checking in briefly with limited partners to stockpile an additional $12.1 billion.

• A number of firms with roots in the distressed industry raised large funds, amid ample talk of the next distressed cycle hitting. These include the $7.5 billion Cerberus Institutional Partners LP Series IV; the $5.75 billion Cargill Inc.-backed CVI Global Value Fund; and the $5 billion MatlinPatterson Global Opportunities Fund III.

• Thomas H. Lee Partners, a generalist buyout shop, overcame the stigma of bankrupt portfolio company Refco Inc. to close its $8.1 billion sixth fund after more than two years in the market. It also closed a $2 billion co-investment fund.

• New York-based Kohlberg Kravis Roberts & Co., in the midst of an IPO that may never happen, kept its KKR 2006 Fund open, which, at last check, had $18.5 billion raised.

• A number of mega-firms returned to market targeting huge amounts, including Apollo Investment Fund VII, targeting a reported $15 billion; Bain Capital Fund X, targeting $10 billion, plus a $5 billion co-investment fund; Carlyle Partners V, a North American-focused buyout fund with a target of $15 billion; Madison Dearborn Partners VI, in pre-marketing with a target of $12 billion; and Warburg Pincus Private Equity X, targeting $15 billion.

• In the middle market, New York turnaround investor KPS Capital and San Francisco-based Genstar Capital were able to move to 25% carried interests, thanks to immense demand among LPs.

LPs, meanwhile, kept pouring in droves into the market. Relative newcomers to the asset class included Arizona State Retirement System (which has carved out a 5% allocation to private equity); Public Employees’ Retirement System of Mississippi (5%); South Carolina Retirement System (5%); Vermont Pension Investment Committee (up to 3%); and West Virginia Investment Management Board (5%).

Several others boosted their allocations to private equity. Indiana Public Employees’ Retirement Fund moved from a 4% target allocation to 8%, while Louisiana State Employees’ Retirement System rose from 5% to 10% and Missouri State Employees’ Retirement System raised its target allocation from 5% to 7.5 percent.

Of course, not every firm had success on the fund-raising trail in 2007. El Segundo, Calif..-based Marlin Equity Partners, a spinout from The Gores Group that invests in technology and health care, closed on its $300 million hard cap this fall after raising a starter fund of $60 million in 2005. “We found LPs wanted to increase exposure to special situations and operational expertise,” says Marlin Equity Partners Director Peter Spasov.

One emerging manager to raise money in 2007 was Mainsail Partners, a technology-focused LBO group founded by former Summit Partners pros Jason Payne and Gavin Turner. The firm closed its first fund with $33 million in 2005, and its latest brought in $100 million. The new fund drew commitments from Oregon Investment Council, via Grove Street Advisors, and from Sacramento Private Equity Partners, a one-year-old $500 million fund managed by Oak Hill Investment Management on behalf of the California Public Employees’ Retirement System. —Josh Payne and David Toll