Q3 Fund Raising Ignores Dark Predictions –

Buyout professionals like to carp about the evils of capital overhang, but such complaints did little to slow down new fund raising during the third quarter.

Between July and September of this year, 14 buyout shops raised a total of $5.54 billion. That figure is double the $2.2 billion committed in Q2, and is nearly 25% higher than the Q1 bounty of $4.3 billion. Moreover, the third quarter also witnessed the closing of the largest buyout vehicle in history, the $6.45 billion Blackstone Group IV LP ($1.35 billion of which was committed during Q3). Ten other funds had final closes in Q3.

Leading the Q3 pack was Charterhouse Development Capital Ltd., which secured $1.36 billion for its Charterhouse Capital Partners VII. The vehicle was launched in February with a $2.67 billion target, and represents the first time that London-based Charterhouse has raised outside capital since gaining its independence from Credit Commercial de France in 2000. Like past Charterhouse funds, CCP VII will target growing businesses across Europe with average deal sizes of between $200 million and $450 million. The only change this time around is that management is committing 1% of the total capital. Salomon Smith Barney is helping to line up limited partners, while Clifford Chance is acting as legal advisor.

Nipping at Charterhouse’s heels was Blackstone Group, with its $1.35 billion Q3 take for a $6.45 billion fund that will admittedly focus on larger deals than its $4 billion predecessor. Stephen Schwarzman, president and chief executive of Blackstone, in July told Buyouts that the key to his firm’s success was to be patient with the process. “We just put one foot in front of the other and kept meeting people,” he said. “From what I observed, in a time of relative uncertainty, more established groups such as ourselves, with a long track record, were more appealing to potential investors than newer groups.”

Indeed, the vast majority of buyout funds securing LP commitments in Q3 came from such erstwhile investment firms as Alta Communications, Castle Harlan and The Shansby Group.

“If you are a new fund, [investors] are trying to scrutinize you to see if you are worth the trouble,” said Kevin Albert, a placement agent with Merrill Lynch. Yet, Albert did offer some encouraging words for new market entrants: “The door is open for new firms with experienced pros from good firms who can use their experiences and resources to build a first-time fund.”

One strong example of such thinking is ArcLight Capital Partners LLC, which closed its $950 million inaugural fund in the waning days of September (See story, page 30). The Boston-based firm is stocked full of experienced investors from within its targeted power industry. “It is certainly difficult being a first-time fund, but investors saw that a lot of us have been in the business for a long time, and know where to look for good deals,” said Daniel Revers, managing partner of ArcLight and former power finance specialist with John Hancock Life Insurance Co.

One of the only other Q3 freshmen was Red Diamond Capital Partners LP, a $150 million private equity fund established and funded by Mitsubishi Corp. Although he did not have to actively solicit capital from third party investors, Red Diamond chief Bret Russell said he will have a special challenge balancing his parent company’s need for growth with a down private equity market. “Some PE investors are very sophisticated, but a couple of whammies have occurred. With an overall shrinking of their assets, with the low stock market, investors are more concerned with safe, solidified returns.”

For graphs and additional data, pick up the latest print edition of Buyouts.