The Return of the LBO Megafund –

After 2002, which was one of the weakest years for fund raising in the past decade, some of the bigger LBO shops have put it upon themselves to see that 2003 will not be as meager. This past month, Texas Pacific Group, Hicks, Muse, Tate & Furst, and The Carlyle Group were all rumored to be putting together new funds with targets above one billion dollars.

In a recent report, Venture Economics (Buyouts’ publisher) estimated that a total of $31.4 billion of non-venture private equity was raised in the U.S. in 2002, down 50% from 2001 and in line with 1997’s paltry numbers.

Texas Pacific Group is said to have the highest expectations, reportedly targeting $4 billion. A source close to the situation expects the firm to begin fund raising in the second or third quarter of this year, although no specific timetable has been set. TPG has already contacted a few institutional investors.

Officials from TPG, Hicks Muse and Carlyle all refused to comment. However, it’s likely that all three funds will be launched, according to sources close to each of the three firms.

At first glance, the fund raising efforts would seem highly ambitious. Private equity fund performance has been disappointing for several consecutive quarters now, and isn’t expected to improve unless the exit market picks up. Moreover, the public market’s contraction has caused several investors to become overallocated to private equity.

“It’s going to be much more difficult to raise funds now than three or four years ago,” said Howard Bicker, executive director of the Minnesota State Board of Investment. “The household names will probably do well, but it is still a tough environment [to reach a billion-dollar-plus target], especially considering that a lot of [pension] plans are not as big as they once were.”

Big Names, Big Ambitions

To be sure, the news of veteran firms like TPG and Carlyle looking to raise large funds was no shock to the market. TPG, for one, did its fair share of spending in 2002, acquiring such big names as Burger King, in a $1.5 billion deal with Bain Capital and GS Capital Partners, and Gate Gourmet, in a deal valued at E668 million. With more corporate carve-outs on the horizon, buyout funds will be deploying plenty of cash in 2003.

Meanwhile, Hicks Muse is looking to begin fund raising in the next several months, with an eye to dig up around $1.5 billion for its second buyout fund in Europe. A source told Buyouts that the firm would likely follow a similar strategy to that of its predecessor European fund, which focused on the middle market, and counted furniture company Hillsdown Holdings and French champagne houses Mumm and Perrier-Jout among its investments.

Also setting its sights on Europe, The Carlyle Group is in discussions with Italian investment bank Mediobanca about raising a E1 billion fund, or $1.08 billion. The bank has previously expressed a desire to establish an independent fund focused on MBOs of mid- to large-market companies and has reportedly been in talks with Carlyle about such a fund since last year. One source said he had seen the private placement memorandum for this fund-raising effort.

Word of Carlyle’s negotiations with Mediobanca comes at a time when the Washington, D.C.-based firm is also engaged in a bid to buy the aerospace unit of Italy’s Fiat SpA, an auction that many expect Carlyle to win. The firm previously closed its Carlyle Europe Partners LP in July 1998 with $1 billion in commitments. That fund was the first raised in Europe by a U.S. private equity firm. As of November 2002, Carlyle Europe had invested approximately 73% of its capital.

A source from a prominent placement agency speculated, “It’ll be tough for some of these players to reach their targets. The top-tier funds, like TPG, will get it done, but LPs have been very leery. They’re concerned about the breadth of product and that returns will be more muted.”