Catharine Burkett: After Seeing It All, Mega FUnds are Out –

Having already devoted a quarter-century of her life to the private equity market-nearly half of which she was the lead investor for two university endowments-Catharine Burkett is not ready to call it quits. At the beginning of the month, Burkett took on a new post at Camden Partners Holdings LLC, a Baltimore, Md.-based fund of funds. From leveraged buyouts, to growth capital investments, to venture capital, Camden runs the gamut. But Burkett will stick to her knitting and head up the 10-year-old firm’s fund-of-funds operation, placing bundles of cash as large as $5 million in both buyout and venture capital vehicles.

With decades of industry experience, Burkett has seen just about everything this still-young asset class has had to offer. She spent the go-go days of the mid-1980s as a securities analyst at the Hillman Co., a Pittsburgh, Pa.-based investment bank, where she was then introduced to the buyout and venture capital markets. She saw that first bubble burst while serving as director of alternative investments at Rogers, Casey & Associates of Darien, Conn.; and as vice president of equity investments for CIT Group.

Burkett then moved on, in 1993, to become investment director for Duke Management Co. (DUMAC), the entity responsible for managing Duke University’s $5.3 billion endowment, where she saw the economy rebuild and the tech bubble inflate. That bubble burst while Burkett was the director of private investments for the $1 billion endowment at the University of Richmond, which is where she spent the last four-and-a-half years before making her recent move to Camden.

So when it comes to her decision-making process, Burkett is not quick to jump on the latest buzz trends flooding the private equity market; instead she relies on what she’s seen and what’s worked for her in the past. For example, with regards to the barbell theory-the belief that returns in the middle-market will be stunted by the fierce deal competition in the sector, that the most lucrative niches to invest are at private equity’s small and large polar extremes-Burkett, personally, only subscribes to about half of it-the lower half.

“On the mega [fund] side, I don’t find things as attractive. Anything above $3.5 billion to $4 billion in fund size is not for me,” Burkett told Buyouts. “The $2 billion to $3 billion funds are big operations but they’re staffed appropriately, they’re doing deals where they have some discipline. There’s competition but it’s rational. The really, really complex big transactions-that’s not the way I like to practice private equity,” Burkett said.

Even with proven money managers such as Warburg Pincus (raising an $8 billion fund) and The Blackstone Group (raising a $10 billion fund), Burkett will not be among the limited partners banging at gates to get in on the world’s largest private equity fund. “I’ve spent 25 years in this business, and they didn’t have funds that size when I started. So the way I look at what private equity can do in terms of value dates back to the fact that I started when things weren’t quite so flush,” she says, adding, “If [the mega funds] prove to me that they can provide outsized returns, then I would be interested, but I guess I don’t really believe they can-not the kinds of returns that we have expected historically over the past 10 years.”

Burkett seeks out funds whose GPs work hand-in-hand with entrepreneurs to “really make a company shine,” she says, noting that the behemoth deals are not so much about that interaction as they are about simply getting a large, complex transaction accomplished. “The larger guys can do a lot of cost reductions, certainly, but they can’t achieve the kind of growth and change that a smaller deal can do, so you’re not going to have the same kind of return,” she says.

Burkett said her sweet spot while at Richmond was well-established funds with total capitalizations between $400 and $1 billion that made $50 million to $250 million plays in the middle- and small-middle markets. Investment vehicles in this bracket that Beckett deployed capital to include Fremont Group’s Fremont Partners III, which closed oversubscribed in 2002 with $920 million, Olympus Advisory Partners Inc.’s $757.5 million, vintage-2003 Olympus Growth Fund IV and RoundTable Healthcare Partners’ $400 million inaugural vehicle, RoundTable Healthcare Partners Fund I LP, which closed in 2002.

Firms on the larger side that Burkett made commitments to include Summit Partners and Welsh, Carson, Anderson & Stowe, which have $5.12 billion and $12 billion of capital under management, respectively, according to Thomson Venture Economics (publisher of Buyouts).

Beckett’s Third Bubble?

Fund size aside, there are other matters at the forefront for today’s limited partners to think about. With the private equity market as revved up as it is and debt multiples on the rise, Burkett says she wonders if the market is ripe for yet another bruising.

“I’ve seen, in the past six months, a lot of [turnaround] firms forming because they think there are going to be some opportunities,” she says, noting that they could serve as the canary in the coal mine.

Ironically, private equity firms attempting to provide faster returns to LPs may be a factor in creating the next distressed environment. “I think we’ve seen, in the past two years, that [buyout shops] have become very successful at doing recapitalizations, there has been a lot of debt available at higher and higher ratios, a lot of capital out there and a lot of firms raising money as a result of a pretty good year last year,” Bekett says. “So buyouts are kind of at their nadir and there are a lot of people wondering if this is, again, a bubble situation.”

She added: “I worry about the firms that recapitalize very quickly after investing in a deal and the leverage is going six to one. That’s pretty scary. So I think the bubble situation is possible. I don’t know that it is going to happen, but I think that it is possible. It’ll be interesting to see what happens.”