Buyout funds march on in record pace

There seems to be no ceiling to buyouts fund-raising. LPs draining their allotments have boosted the buyout and mezzanine fund-raising total for U.S. firms to $140 billion in the first nine months of the year, and the market looks to break the $183 billion record tally set last year.

Already, the market is ahead of the $111 billion raised through the first nine months of 2005. Buyout funds raised $58 billion in the third quarter, almost double the $33 billion raised in the same period last year. And the market could be in for a truly stunning year as firms race to close thier vehicles by year end.

Megafunds remain the darlings of investors. Many big names made headlines in the third quarter, including The Blackstone Group, which closed its $15.6 billion fund; Kohlberg Kravis Roberts & Co., which is reportedly on track to raise up to $16.5 billion for its Millennium II fund; and First Reserve Corp., which rapidly raised and closed an 11th fund of $7.8 billion.

Using $4 billion-and-up as the definition of a megafund, Buyouts (an affiliated publication of PE Week) found nine megafunds that have collectively raised $42 billion this year. That total does not include any of the following firms that are tight-lipped about their fund-raising: Goldman Sachs, which is reportedly eyeing $10 billion; Providence Equity Partners, which has a fund with a $10 billion target; Texas Pacific Group’s $14 billion projected fund; and Thomas H. Lee Partners’ sixth fund, which is aiming for $9 billion.

If all of those funds close on their targeted amounts by year end, 12 U.S.-based funds will have have raised more than $80 billion in 2006 and those 12 funds would have a combined value of $118 billion (the balance being raised last year).

“That giant sucking sound you hear is Blackstone and Bain Capital and a couple other megafunds doing huge closes,” says one frustrated general partner, whose firm had raised half its middle market fund by March, but since then has been in the queue behind megafunds to raise the other half. “Our LPs were saying, ‘Yes, yes, we can’t wait to invest with you, but we’ve got to give Blackstone $250 million before we think about your $50 million.’ ”

Other big funds that closed in the last three months include Berkshire Partners’ seventh fund, with $3.1 billion in commitments; Bear Stearns’ Merchant Banking Partners with $2.7 billion for fund III; The Carlyle Group’s $1.8 billion Carlyle Asia Partners II; and GTCR Golder Rauner’s ninth fund, with $2.75 billion. In the middle market, complaints aside, some funds had success. Shamrock Capital Advisors, Lovell Minnick Partners, Long Point Capital, Fulham & Co. and ACI Capital all closed funds.

ACI founder Kevin Penn had this to say about any firm that fears being able to raise a fund in the middle market, or hates the label JAMMBOG (Just Another Middle Market Buy Out Group): “I think that LPs are still looking for good opportunities in middle market funds. While megafunds are absorbing the lion’s share of the dollars, for people with good experience and returns there is still capital available.” ACI closed its ACI Capital Investors II with $335 million in the third quarter.

Kelly Deponte, with placement agent Probitas Partners, says that he is beginning to see renewed interest in middle market buyout funds and other smaller vehicles now that most of the mega buyout funds have cleared the market. “Though a lot of investors are focused on 2007, others are looking to fill out what remains of their 2006 allocations in the fourth quarter,” he says.

Even if the megafunds do continue to put a strain on smaller firms, there is an upside to it. One firm, raising a middle market fund with a high roman numeral, could only raise a few hundred million dollars and was then told by LPs to wait until 2007. The amount of capital being raised “is ridiculous,” says a manager at the fund. “But I love it, because it’s offering us an exit. We used to do all our deals via strategics for cash. But with the megabuyout funds, they’re buying our deals and paying 15% to 20% more.”

This story originally appeared in Buyouts, an affiliated publication.