Fundraising Market Shows Strength

Mounir Guen, CEO of MVision, a global placement agency that might have 12 funds in the market at any given time, said his firm has represented funds that have closed in as few as 30 days. But those are the exceptions. “The main road is 12 to 18 months these days,” said Guen. “It’s hard work.”

All told, U.S. buyout and mezzanine firms did the hard work of closing on $45.3 billion in the second quarter, bringing the year-to-date tally to $71.4 billion. That lags the $81.4 billion tally at mid-year 2012, but remains well ahead of the $46.1 billion raised at this point two years ago.

With the economy on the mend, placement agents say conditions remain favorable for fundraising this year. Tripp Brower, a partner at Dallas-based Capstone Partners, rates the market a seven on a scale of one to 10, a notch up from six a year ago. And so, with U.S. buyout firms still a collective $109.8 billion short of their targets on funds in the market, we could easily see more money raised this year than the $160.7 billion raised by both U.S. buyout and mezzanine firms in 2012.

Institutional investors, whose deep pockets finance the asset class, seem poised to do their part. According to the summer 2013 edition of The Barometer, a well-regarded survey of limited partners conducted every six months by secondary buyer Coller Capital, roughly one in four plans to boost its target allocation to private equity in the next 12 months, compared with only about 15 percent that plan to reduce their targets. In one of the latest examples, Oregon Investment Council voted last month to raise the private equity allocation target to 20 percent for the $62.4 billion in pension assets it manages, up from 16 percent previously. The council has been directing $1 billion to $2 billion into the asset class each year. The North Carolina Retirement Systems, meantime, took a step closer to raising its cap on alternative investments to 40 percent from 34 percent, after the state senate approved the move earlier this year.

That said, many institutional investors are still digesting large numbers of commitments made in the late 2000s. Case in point again is Oregon Investment Council, which at a 22 percent actual allocation to private equity remains above even its just-raised allocation target. Funds of funds, under pressure by fee-averse investors, appear to be a less reliable source of funding than in the past. “Your traditional sources of capital are drying up,” observed Paul Denning, CEO of San Francisco-based placement agent Denning & Co., adding, “We’re looking more at the high net worth area.” Denning pointed to the Bill & Melinda Gates Foundation as one family office with a known appetite for private equity.

As for the supply of funds in the market, Buyouts counts 230 U.S. buyout firms that have been in the market raising money this year (including those that held final closes). That is down slightly from 255 at this time last year. Around the world, Capstone Partners considers the total number of buyout and venture capital firms raising money to be “pretty staggering,” although Brower said that the “real fundraisable GP (universe) is obviously much lower than the numbers might give you an indication of.” He added: “There are a lot of groups that have issues, and I’m not sure the traditional LP market is going to be their best source of capital.”

Turnarounds, Energy Hot

Based on investor tastes in the first half of the year, the ideal fund to launch right now would be an energy turnaround fund with a target in the $1 billion to $4.99 billion range.

U.S. turnaround firms took in $7.4 billion altogether in the first half of the year, while energy and power shops grabbed $9.5 billion. U.S. sponsors with targets in the $1 billion to $4.99 billion range took in $27.2 billion in the first half, the most of any target ranged tracked by Buyouts.

KPS Capital Partners, a New York-based turnaround specialist that set a $3 billion target on its fourth fund, had two of those three elements in its corner, plus a sterling track record over its three predecessor funds. KPS Special Situations Fund IV finished in April at $3.5 billion after a less than three months in the market.

Likewise, at press time Marlin Equity Partners, based in Hermosa Beach, California, announced it had secured the $1.6 billion it had targeted for its fourth turnaround fund, Marlin Equity IV LP. Distressed debt specialist Wayzata Investment Partners wrapped up its third fund at $2.7 billion after a lengthy fundraise that began in the third quarter of 2011. The Minnesota shop attracted commitments from Florida State Board of Administration, Minnesota State Board of Investment and Nebraska Investment Council, among others.

In the energy patch, Riverstone Holdings LLC made a huge splash, minus its former partner Carlyle Group, by wrapping up its fifth energy buyout fund at $7.7 billion, well ahead of its $6 billion target. Backing came from California Public Employees’ Retirement System, which made a $400 million commitment, and New Mexico Public Employees Retirement Association. Ridgewood Energy gathered $450 million for its second fund as it strives to hit a $750 million target.

Among the firms to raise the biggest sums in the first half was Silver Lake, which this year took in $6.3 billion of the total $10.3 billion it raised for its fourth core fund, well ahead of its $7.5 billion target. A person familiar with the effort told sister news service Reuters that the Silicon Valley-based tech specialist, in the midst of a battle for Dell Computer, took in more money from abroad (especially Asia and the Middle East) than it did from the United States for the first time. The firm remains in the market with handful of other specialist funds.

Warburg Pincus, which invests at every stage, from venture to buyout, secured another $5.7 billion or so for its latest global fund this year, bringing the pool to a final close of $11.2 billion, within shouting distance of its $12 billion target. The New York-based firm and its executives anted up more than $300 million of their own money to the fund, Reuters reported.

Bain Capital, meantime, took in half the $6 billion it is seeking for its 11th core fund. The Boston buyout shop, owner of retailers Burlington Coat Factory and Michaels, buys companies in a variety of industries, including consumer goods, business services, financial services, healthcare, energy and technology. Mount Kisco, New York-based Kohlberg & Co., which recently announced the purchase of the manufacturer of Steinway pianos, collected $1.6 billion for its seventh fund, ahead of its $1.5 billion target. Backers include Allstate Insurance Co., Hamilton Lane and Development Bank of Japan.

Fresh Blood

In times bad and good the industry always seems to find a way to replenish itself, and the latest quarter was no exception.

The dissolution of CHS Capital, the Chicago buyout shop formerly known as Code Hennessy & Simmons, has produced at least three new groups. Among them is Shorehill Capital, to be seeded with $100 million from its principals, including Brian Simmons, David Hawkins and Marcus George. The firm plans to back companies in industrial and distribution sectors with enterprise values ranging from $25 million to $300 million. Another is New Harbor Capital LLC, whose executives Tom Formolo, Ed Lhee, Jocelyn Stanley and John Pircon plan to back fast-growing companies in business services, healthcare and education.

Insignia Capital Group took the spotlight after Los Angeles County Employees Retirement Association revealed it had approved a $100 million commitment to the lower-mid-market specialist’s debut fund. The Walnut Creek, Calif.-based firm, led by David Lowe, a co-founder of Friedman Fleischer & Lowe, has set a $350 million target on the pool.

Meantime, Buyouts last month broke news of a start-up buyout shop led by Martin Nesbit, a Chicago entrepreneur with links both to the billionaire Pritzker family and President Barack Obama. The Vistria Group plans to seek $500 million for a debut fund earmarked for mid-market buyouts in healthcare, education and financial services.

Among those reaching the finish line, Ridgemont Equity Partners hit its $735 million target on its first fund since spinning out of Bank of America Corp. in 2010. With backing from AlpInvest Partners, State of Wisconsin Investment Board and others, the firm plans to invest in mid-sized companies in four sectors, including energy and telecommunications.

Given the level of due diligence being conducted by LPs, raising a debut fund in a reasonable amount of time has to be counted a major accomplishment.

Capstone Partners’s Brower called the level of scrubbing by LPs today on prospective funds an “order of magnitude deeper” in the wake of the financial crisis. “If they used to call 30 references, they’re calling 60 in a lot of cases. That’s obviously feeding the time component.”

CORRECTION: Due to a production error, some numbers appeared in the wrong columns in the tables that ran in the July 15 edition of Buyouts (pp. 30-37). Those tables, corrected, can be viewed by clicking the link at the right.