LBO fund-raising perks up in first half

The second quarter saw buyout shops raise almost twice the amount gathered in the first quarter, thanks in part to strong interest in turnaround investing, mezzanine and non-U.S. funds.

In the second quarter, general partners collected $21.3 billion, compared to $10.2 billion raised in the first quarter.

But the pace of fund-raising still lags behind that of 2009, with the $31.5 billion having been raised in the first half of this year short of the $36.2 billion in the same period last year.

The fund-raising totals reflect capital raised by U.S. buyout and mezzanine firms for LBOs, real estate, infrastructure, distressed-debt control and related strategies, regardless of deal locations.

The sluggishness can be traced in part to the enormous keg of dry powder that GPs are sitting on. U.S. buyout shops have an estimated $425 billion raised from 2004 through 2009 yet to spend. There’s also the matter of tempered demand, as limited partners remain wary of committing too much money to an illiquid asset class while the public equity markets remain volatile and the economy fragile.

Currently, 198 funds are seeking a total of $216.1 billion, well below the 227 funds seeking $332 billion one year ago, according to Buyouts, a PE Week affiliate publication.

“You’re still going to see funds that get raised, but…it has to be an extraordinary fund to get time and attention from LPs,” said Robert Hofeditz, a managing partner at the San Francisco-based placement agency Probitas Partners.

Among the funds getting that time and attention from LPs are a number of turnaround funds, as investors remain unconvinced that the economy—or at least many of the companies operating in it—are out of the woods.

A total of 23 distressed funds have been in the market in 2010, six of which have closed. The combined target of all these funds stands at $27 billion, of which $13 billion has already been raised. Distressed funds nabbed 19.4% of the total raised so far this year, up from 10.4% at this time last year.

Oaktree Capital Management is one example of a turnaround specialist making strides in the fund-raising market. As of early June, the firm had collected $2.9 billion for OCM Opportunities Fund VIII, putting it nearly half way toward its $6 billion target for the fund, earmarked for investing in the securities of distressed companies.

“The current economic downturn and increased corporate default rates should result in an enlarged set of target opportunities for this strategy,” according to an April Oregon Investment Council document discussing the fund.

Launched in June 2009, the vehicle’s LPs include the Alaska Permanent Fund Corp. and the Maine Public Employees Retirement System.

Other turnaround firms making headway on their road shows include Littlejohn & Co., which has raised $1 billion toward its target of $1.25 billion for Littlejohn Fund IV; Monomoy Capital Partners, which has gathered $300 million for its $350 million-targeted second fund earmarked for corporate restructuring investments; and Z Capital Partners, which sponsors distressed debt-for-control deals and has raised $300 million toward its target of $500 million.

In the meantime, the number of mezzanine funds in the market and the amount they’ve raised have also skyrocketed in the past year, thanks in part to the fact that such funds start returning capital to LPs quickly. That’s a big attraction for cash-strapped pensions that need to fund retirement payouts.

Thomson Reuters (publisher of PE Week) is tracking 31 such funds, which so far in 2010 have raised $4.4 billion, or 13.8% of the buyout and mezzanine fund-raising total. At the mid-point of last year, 21 funds had gathered $623 million, or 1.7% of the total.

Funds making progress include KKR Mezzanine Partners I, having raised $350 million toward its $1 billion goal; Oaktree Mezzanine Fund III, with $952 million collected toward an objective of $2.5 billion; and Providence TMT Special Situations Fund II, with $300 million toward its $1 billion target.

Another popular mezz fund gliding to a final close is Audax Group’s Audax Mezzanine Fund III, launched in December and targeting $750 million. The firm so far has raised $700 million from the Arkansas Teacher Retirement System, the Kansas Public Employees Retirement System and the New Hampshire Retirement System.

Small and mid-market funds are feeling the love from investors, in part due to disenchantment with mega-funds, in part to a belief that GPs can more easily improve the performance of smaller companies.

Mid-market firms recently seen moving ahead include Energy Capital Partners, which has secured $3 billion for Energy Capital Partners II on the way to a $3.5 billion goal; Corsair Capital held an interim close on at least $395 million for Corsair IV Financial Services Capital Partners, nearly a quarter of the way to its $2 billion target; and Gores Group has grown Gores Capital Partners III to more than $1 billion toward a target of $1.5 billion.

One of the bigger success stories in the $1.1 billion to $5 billion category has been Francisco Partners’ Francisco Partners III, which launched in early 2009 and has raised $1.5 billion toward its $2 billion target. The fund is earmarked for investments in the communications, hardware, information technology services and software sectors. Supporters include the Oregon Public Employees’ Retirement Fund, the Pennsylvania State Employee’ Retirement System and the University of Michigan.

Look for fund-raising to pick up steam in late 2010 and early 2011. Firms expected to hit the market include funds-of-funds manager Adams Street Partners, which has wrapped up its latest U.S. and non-U.S. vehicles at $1.3 billion and is looking to raise $1.5 billion to $2 billion this year; DW Healthcare Partners, which invests in the smaller end of the middle market, and is expected to launch fund III by year-end with a target of $300 million, after raising $160 million in 2008; mid-market buyout firm GTCR Golder Rauner, which appears poised to launch fund X, after raising $2.75 billion for fund IX in 2006; and fund-of-funds manager Northleaf Capital Partners, which is launching fund V with a $200 million target, after raising $238 million in 2008.

A longer version of this story previously appeared in Buyouts, an affiliate publication of PE Week.