Raise $5.8B, A Steep Drop From Q4 –

At this time last year, first quarter fund raising estimates were hovering around $3.4 billion, which put 2003 on pace to raise the lowest total in 10 years. At the time, one industry expert forecasted, “It seems pretty clear already that 2003 will take us back to the early 1990s in terms of fund raising totals for U.S. funds.”

Fast forward to the fourth quarter of 2003. That one quarter saw $15.5 billion raised, which topped the previous three quarters and represented the largest quarterly amount raised since the fourth quarter of 2000. In the end, 2003 saw $24 billion raised for the buyout industry, which beat out 2002 by $7 billion.

So buyout pros shouldn’t be alarmed when they hear that only $5.8 billion was raised in the first quarter of 2004, according to Buyouts. There are two reasons given for the low number: 1. buyout shops have enough money and are not looking for more and 2. the fund raising environment is still tough. “In general, fund raising hasn’t been good,” said Michael Hermsen, a managing director with David Babson, which closed its Tower Square Capital Partners LP fund with $265 million, just short of its $300 million goal. “It was just much more difficult than we expected.”

It wasn’t just a tough market for U.S. funds. Although Terra Firma Capital Partners II is not reflected in Buyouts’ data because it is U.K.-based, the $1.2 billion fund also closed last quarter short of its target at $2.4 billion. “I don’t know that the fund-raising market could be anymore difficult,” Terra Firma’s director of investor relations, Bill Miles, said. “The process was long and arduous, and the limited partners today have become very skeptical.”

Investors in the fund, Terra Firma Capital Partners II, include Adams Street Partners, NIB Capital, Wilshire Associates, Horsley Bridge, the State of North Carolina, Dupont, GE Structured Finance, the Canada Pension Plan Investment Board and Nomura, which is the largest investor, contributing 10% of the total commitments. Merrill Lynch and Citigroup were hired as placement agents for the effort.

Of the $5.8 billion that was closed on in Q1 in the U.S., about a third of it came from Carlyle/Riverstone Global Energy & Power Fund II, which raised $1.1 billion and closed $100 million over its $1 billion target. Monitor Clipper is also responsible for $800 million of the quarter’s total.

Glencoe also closed its fund last quarter and like its contemporaries fell short of its $450 million target. The fund held a final close with $382 in its coffers. “We were seeing a number of investments piling up and felt like we had a lot of long-term loyal institution behinds us, so it was time to get back to work and focus on making investments,” said Glencoe Chairman David Evans.

Like Glencoe, many buyout firms just want to focus on getting the capital they do have deployed. Additionally, plenty of capital has been raised in the last couple of years, which needs to be put to work. In 2000 alone, more than $60 billion was raised. While fund raising hasn’t reached quite that level since, about $35 billion was raised in 2001. “Why do you think deals are getting bid up at auction? Because there is still a lot of money that need to be put to work. People are more worried about getting their money into good deals than they are about fund raising,” said one buyout pro.

Bruce Rauner, a senior principal with GTCR Golder Rauner, agrees. “Everyone is aggressive because there is all this buyouts money that has to be put to work. We are back to the wild days of auctions being bid up, money chasing deals and firms paying high prices.”

Chris Reilly, a partner with Saunders, Karp & Megrue, L.P., felt the same way. “There is quite a bit of private equity capital available for investment. A lot of private equity funds were raised in 1998 and 1999, and their five year investment horizons are looking shorter and shorter, with a lot of unspent or un-invested capital. I think that’s driving some of the market at this time.”

Looking ahead, most expect fund raising will rebound a bit and look a lot like last year. “We’ll probably wind up raising about the same as last year and that’s plenty,” said the buyout pro.