The accompanying table shows just how tough a time select mega-firms have had with vintage 2006 and 2007 funds, which sustained head-on collisions with a credit crunch and then with the Great Recession that followed. Consider the 2006 vintage TPG Partners V, a $15 billion fund that as of March 31 was showing a loss for backer Oregon Public Employees Retirement System. (TPG declined to comment.)
Although some admit to mistakes, sources close to three firms with mega-funds near the bottom of the performance list—Bain Capital, The Blackstone Group and Permira—say it’s too early to write them off as disasters or even duds. They point to the strong performance of portfolio companies yet to be fully exited; conservative valuations that may well underestimate windfalls to come; and, in some cases, the fact that they held on to much of their dry powder until the worst of the recession was over, and prices had bottomed out.
“I do wonder if [the overall 2006 vintage] won’t turn out better than some anticipated,” said a source familiar with the performance of London-based Permira. “That doesn’t mean it will be great. But not bad, particularly relative to other asset classes.”
Of the three firms, Bain Capital, which began investing its $8 billion Bain Capital Fund IX LP in late 2006 and speedily put most of the fund to work in the pre-crisis days of 2007, seems the most humbled, though hardly depressed. A source familiar with the fund’s performance said the firm has acknowledged to investors both “ignoring the element of time diversification” as well as loading up “on highly cyclical business right at the beginning of the biggest downturn in modern economic history.” Not usually a combination that bespeaks success.
In fact, given that the fund should by all rights be “dead,” yet has outperformed the S&P 500 by 350 basis points, the partners consider the fund to mark one of the firm’s “greatest hours,” our source said. Just how great? Out of about 22 portfolio companies, the firm has only written down one to zero. Bain Capital held all but another five or so companies as of March 31 at cost or at a gain. At the same time the firm has recorded four IPOs (Bloomin’ Brands, HCA, NXP and Sensata Technologies), scored half a dozen exits or partial exits altogether, and returned about 20 percent of total invested capital to investors. Revenues across its portfolio have grown at a 6 percent compounded rate over the last three years, and EBITDA 8 percent, our source said. The portfolio’s “got really good companies in it.”
Blackstone Group carries on its shoulders the burden of managing not just the largest 2006 buyout fund, but the largest buyout fund ever raised, the $21.7 billion Blackstone Capital Partners V LP. Backer Washington State Investment Board as of year end carried it at just about break-even, assigning it a 1.00x investment multiple and 1.45 percent IRR. A source familiar with the fund, who puts the investment multiple a tad higher at 1.1x, said the story of its performance is far from complete.
For one thing, the firm has yet to fully exit any of its ten largest deals, including Biomet Inc., Nielsen and Hilton Worldwide, our source said. It has also registered just four complete exits out of a fund that made at least 56 investments, most of them control-stake deals. Second, the remaining portfolio companies are, overall, performing well. Last year, for example, 90 percent of the portfolio companies posted higher revenues than the prior year, and 80 percent posted higher EBITDA. Most persuasively, from January 2011 through the middle of this year the firm across all its funds had realized prices on average 70 percent higher than their most recent valuation marked by Blackstone Group. Its investment multiple on realized investments in Fund V is a more-than-respectable 1.7x, our source said.
Through year-end Permira was running about break-even on its 2006 Permira IV LP, originally an €11.1 billion ($13.9 billion) pool subsequently cut to €9.6 billion, according to backer New York City Police Pension Fund. But our source familiar with the performance of the fund gave higher numbers through the end of June—a 1.28x investment multiple and 7 percent net IRR. And there’s plenty of unrealized value. Of about 18 portfolio companies in total, the firm has sold just three, as well as some of its interest in a fourth. Three of those four deals produced at least 2x multiples on investment for the firm, while it lost more than half of its money on the fourth. (The size of these investments were generally in the range of €300 million to €600 million.) Of the unrealized investments Permira is holding “less than a handful” at just less than cost, while holding the rest at either a little above or comfortably above cost, according to our source.
So how did these mega-funds do it? Our source familiar with Permira IV’s performance said that by virtue of its size the fund enjoyed some advantages over its smaller peers. The large companies the firm backs have “more levers they can pull when things get difficult,” they tend to have more diverse customer bases, and they have “very high quality management [teams] by and large.”
Our sourced added: “While things may have been tough, [big companies] have been able to battle their way through and as the economy has improved you’ve seen recovery.”
(CORRECTION: The original version of this story referred to Permira IV as an €11.1 billion pool. It has subsequently been cut in size to €9.6 billion after the firm offered LPs a chance to cut their commitments.)