Madison Dearborn’s sixth fund may take awhile to reach $10B

Madison Dearborn Partners is resigned to that fact that it’s going to take a little bit longer to raise its $10 billion sixth fund.

The Chicago-based buyout shop typically spends three to four months raising its funds, said co-CEO Paul Finnegan. But that hasn’t been the case with its latest effort because of the downturn in the leveraged buyout market, he said.

Finnegan said that he expects fund-raising to take “a lot longer” for fund VI, and he expects other firms raising large funds to face similar challenges. “That’s the cycle we’re in,” he said.

Finnegan made his comments last week during a keynote address at PE Networking Chicago, a conference presented by PE Week affiliate publication Buyouts.

“It’s amazing because when we were raising our last fund, there was real concern about the middle market,” Finnegan said, when asked about the trend toward more specialized buyout firms. “Now the reverse is true. The large funds are being punished.

The firm began raising fund VI in November. In April, it held a first close on $3 billion, according to a regulatory filing. At the time, a source familiar with the fund-raising effort told Buyouts that the firm was expecting to soon close on $5 billion. The firm has not filed any regulatory documents since its April close.

The source said that the LBO shop will likely keep the fund open through the end of the third quarter to accommodate several long-standing limited partners that must wait a few months before they can commit to the new vehicle.

Madison Dearborn closed on its fifth fund, a $6.5 billion pool, only two years ago. The largest investment from that fund—to cover the firm’s contribution to the multi- billion-dollar take-private of Canadian telecommunications giant BCE Inc.—is still pending.

People familiar with the firm have attributed the slow fund-raising to the wake of the credit crisis and economic slowdown, in which Madison Dearborn and other large buyout firms have slowed their distributions to limited partners.

In addition, the firm has entered a choppy fund-raising market. Large public pension funds, the ones that can afford to make big-dollar commitments to the multi-billion-dollar funds being raised by mega-firms, are butting up against their allocation ceilings. Many public LPs are seeing the value of their overall portfolio, including public equities and fixed-income holdings, decrease in the bear market, shrinking the size of their allocation to alternative assets, which is typically set as a static percentage of the entire portfolio.

Nevertheless, Madison Dearborn is currently seeing more opportunities in minority investments, a traditional strategy that has accounted for about 59% of the firm’s deals, according to Finnegan.

“We’re not seeing many leveraged opportunities,” he said. Instead, the firm is seeing more growth equity and expansion capital opportunities, he said.

Other interesting tidbits from the keynote address:

• Finnegan said that expects the internal rate of return for Madison Dearborn’s fourth fund to come in at about the high teens to early 20% range.

• A common critique of large buyout firms is that they raised too much money at the height of the boom. Finnegan said that he is more concerned about firms that expanded from about 45 professionals, which is about the size of Madison Dearborn, to 400 to 500 professionals worldwide. “What’s going to happen to them now that deals have slowed down?” he asked.

• Finnegan also said that the firm may add another office. But he did not give specifics.