Thomas H. Lee Launches $5B Fund V –

Boston’s 800-pound gorilla is about to get a lot bigger.

Private equity pioneer Thomas H. Lee Co. this month launched its fifth buyout fund – a vehicle which has a target of $5 billion and could round up as much as $7 billion, according to industry sources.

If Thomas H. Lee Equity Fund V LP attracts more than $5.7 billion, it will become the largest private equity fund ever raised, surpassing the KKR 1996 Fund, which is managed by New York buyout veteran Kohlberg Kravis Roberts & Co.

In raising the new fund, Thomas H. Lee Co. will tap the vast distribution network of its new partner, Putnam Investments, which bought a 20% to 25% stake in the buyout firm last summer (BUYOUTS July 19, 1999, p. 3).

A placement agent source said the firm’s affiliation with Putnam, strong past returns and quick investment pace should help it draw enough commitments to break KKR’s record. “They turned away over a billion for the last fund, so raising five billion is probably going to be pretty easy,” the source said. “It took them less than three years to invest that fund, so what’s a couple of billion more?”

Thomas H. Lee Co. closed on $3.45 billion in 1998 for its fourth fund after receiving nearly $5 billion in interest from potential investors.

However, several trends in the buyout marketplace make the vehicle’s rise to the top less than certain. The fund’s launch is the first of an anticipated glut of buyout mega-funds to hit the market this yearfrom brand-name firms, including offerings from KKR, E.M. Warburg, Pincus & Co., The Blackstone Group, Welsh, Carson, Anderson & Stowe and Hicks Muse Tate & Furst. The placement agent source said all of these groups are expected to seek in excess of $4 billion each.

Institutional investors have yet to demonstrate the kind of demand for buyout funds that will be necessary if all of these mega-funds are to hit their respective targets.

Last year investors demonstrated a record-breaking craving for venture capital funds, committing approximately $38 billion to such vehicles (BUYOUTS Jan. 24, p. 6). By contrast, investors committed $33 billion to buyout funds, down considerably from the $55 billion raised in 1998.

Despite the demand for investment funds that specialize in the Internet and telecommunications, Thomas H. Lee Co.’s new fund will maintain a generalist, opportunistic strategy, according to a source close to the firm. This strategy will include buyouts across a range of sectors, as well as minority deals. The firm will make technology investments through its venture with Putnam Investments called TH Lee Global Internet Managers, which currently is raising a fund targeting $1 billion.

Other buyout firms, such as Blackstone, Hicks Muse and Texas Pacific Group, are spicing up their new offerings by raising tech and telecom “stapled” funds, which can receive co-investments from their respective main funds in tech deals.

Thomas H. Lee Co. has had little trouble finding places to put its capital of late. The firm’s most recent deal saw the firm invest $500 million-its largest equity piece ever-for a 7% stake in Conseco Inc., an insurance and consumer-finance company. Last year, the firm invested $300 million in Metris Cos., and issuer of credit cards. In December, Thomas H. Lee Co., along with Evercore Capital Partners, acquired marketing services company Big Flower Holdings Inc. in a recapitalization valued at nearly $1 billion.

Tom Lee Looks Ahead

Part of the benefit of Thomas H. Lee Co.’s partnership with Putnam Investments was that it set a value on the firm’s buyout business, which should allay possible conflicts over partner compensation as firm founder Thomas Lee looks toward retirement. A source close to the firm said a structure was in place to gradually phase out the participation of the firm’s older partners as they become less involved with investment activities. “[Lee] still has his name on the door, but there’s a winding down program,” the source said. “You would find that most places. It’s an issue everywhere.”

Thomas H. Lee Co. currently has nine partners, and will add no new professionals to help manage the increased capital.

Mezz Fund Rests

In marketing its fifth fund, Thomas H. Lee Co. for the second time has halted its efforts to raise a $750 million mezzanine fund. The firm originally planned to launch Thomas H. Lee Subordinated Capital Fund LP early in 1999, but set those plans aside to focus on its joint venture with Putnam Investments. The firm again drew up plans for the mezzanine fund in September, but, according to a source, will relegate the effort to a “side burner” as marketing for Fund V begins.