The New Fundraising Theme: Mine is Bigger Than Yours

The $8 billion ninth fund was scheduled to close after press time last Wednesday but before the quarter ended, while the $2 billion co-investment fund will close shortly thereafter. The funds brought the total for the first quarter close to on par with last year’s first quarter close, at about $35 billion.

Not to single out Bain as the only large fundraiser, but what the firm achieved is representative of what will likely be a rash of enormous funds to be closed in 2006. One placement agent said Blackstone took on the role last year as the “symbol for the industry,” a kind of frontiersman further along the path, looking out into the land of plenty. To date, The Blackstone Group has raised more than $12.5 billion and is expected to close on around $13.5 billion shortly. Other funds like Texas Pacific Group and Bain continued to push up their targets during the first quarter, not to be outdone.

Carlyle’s co-head of U.S. buyouts, Alan Holt, captured the atmosphere in private equity at Buyouts’ conference last month. “Our fund for U.S. buyouts was $7.8 billion, which was probably the largest U.S. buyout fund for about three minutes.”

To give credit where credit is due, the first completely closed $10 billion-plus fund was that of Apollo Management, which did so early on in the first quarter, closing on $10.1 billion for its sixth fund. Other targets out there now are Blackstone Capital Partners V’s $13.5 billion, KKR Millenium II’s $10 billion, and TPG’s Fund V, which is now targeting $14 billion.

Not everyone raising private equity money is pumped up about how easy it’s been to get capital invested. One manager that closed a mid-sized fund in this quarter didn’t want his name associated with the following quote: “Of course there’s too much money out there. Are you kidding?”

On To The Totals

In the first quarter, Buyouts tracked $32.8 billion in buyout funds raised by U.S.-based firms, $1.96 billion in mezzanine and $533 million in funds of funds. That matches the pace of last year’s first quarter total $35 billion of mezz and buyout funds raised. The number are on pace to match last year’s buyout and mezzanine yearly total of $182 billion. As for numbers of actual funds, Buyouts tracked more than 190 of them being raised by U.S. firms, while estimates from industry sources put the number at around 700 funds being raised worldwide. Big funds besides Apollo and Bain that closed included Vestar’s Vestar V, with $3.7 billion and Clayton Dubilier & Rice’s $4 billion fund, which at press time was set to close March 31.

In Europe, meanwhile, the trend is the same—the bigger the better. Beating out the ?6 billion fund raised by CVC Capital Partners last year, fellow U.K.-based Permira will be raising the largest ever fund outside the U.S., at ?8.5 billion ($10.4 billion). That will be the first non-U.S. fund worth more than $10 billion—likely to assume the role of beckoning symbol to other fundraisers there.

Richard Ansbacher, a partner with Fried, Frank, Harris, Shriver & Jacobson who advises private equity groups, said, “we’ve just gone through a big cycle of follow-on funds. In the remainder of the year I don’t see any slowing. Investors are trying to hold slots and prevent scale backs.”

“We didn’t expect 2006 to be as strong as 2005, but it is proving to be as strong if not stronger,” said Chris Caputo, managing director at placement agent Fortress Group. He added, “Funds are coming back quicker to the market. Their hold periods have shortened, so in some cases they are still hitting investment thresholds of 70% to 80%, but are putting money out quicker and exiting businesses faster.”

Mr. LP, Could I Have the Time Of Day?

Bain, for example, raised its last fund in 2004, and was back in the market two years later. Naturally, this has created a time crunch for LPs. “A lot of investors are buried with re-ups at the moment so it is difficult to get time with them to look at new things. That may change later in the year as these more established funds clear the market,” said Kelly DePonte, partner at placement agent Probitas Partners.

“Generally speaking, the LP community is overwhelmed with transactions. Getting their attention is a problem. You get a week’s visibility. If you get a call that says, ‘Hey you need to be in Minneapolis tomorrow,’ you go to Minneapolis,” said one private equity pro at a mid-sized fund, who agreed to be interviewed from the airport on his way to meet an LP.

The same source characterized the LP response to his fund this way, “Gee wiz, we want to get to you guys, but we also want to re-up with four other guys. We love you guys, but we’ll see you in May.”

At least one first-timer had some luck this past quarter. Scott Steele, who helped close JMH Capital’s $101 million fund this past quarter, said the bias against first time funds was “a very real thing we had to deal with.” He added, though, “There’s a number of LPs that are actively seeking to fund emerging managers. Our success in fundraising was largely a function of connecting with those kinds of groups.”

Emerging markets, meanwhile, proved attractive to LPs once again. One manager at an Asian fund noted, “We’re actually getting unsolicited interest.” TPG’s Newbridge IV raised $1.5 billion in the first quarter. Carlyle is currently raising its third Asia fund, with a target of $250 million which is close to closing. The consensus hot areas seem to be India, China and Central Europe.

But Seriously Folks…

There are a few downers, though probably not as many as were anticipated at various times last year, when it appeared record-shattering 2005 could not be beat. The most prominent cause for concern is financing.

“We see concerns among investors for the generalist mid-market funds. The question is what their returns will look like on risk-adjusted basis when this well financed market comes down? That’s the space that will be affected most,” said Carl Nauckhoff, of placement agent MVision.

Russell Pennoyer, a partner with placement agent Benedetto Gartland & Co., was also worried about high tolerance for leverage levels. “Everyone knows the debt market may become less favorable, but that’s not the case right now. It’s what Donald Rumsfeld would call a ‘known unknown’. We know it’s going to happen but we don’t know when.”