Bloomberg News

KKR, Apax Lead Cannibals Contest for Shrinking Investor Dollars

July 13, 2011

July 14 (Bloomberg) -- About a month after London-based Apax Partners LLP began raising a 9 billion-euro ($12.7 billion) leveraged buyout fund, local rival Permira Advisers LLP told investors it wanted 6.5 billion euros for a new pool, people briefed on the talks said.

Permira, which still has more than a year to finish investing its existing 9.6 billion-euro fund, is joining a rush by private-equity firms including New York’s KKR & Co. and Warburg Pincus LLC to raise cash now, just as investors warn they haven’t got the money to continue backing all firms.

“Many firms have realized they can’t count on their clients’ loyalty only to raise funds,” said Jeremie Le Febvre, a partner at Triago SA, which helps firms raise money. “They can’t afford to wait if they want a piece of the pie. It’s reality-check time for everyone, and some will be disappointed.”

Investors in private-equity funds, known as limited partners, say they’re planning to reduce pledges to the largest of the new pools and invest in fewer of them, partly because they haven’t received enough money back from previous funds to match commitments during the boom years. LPs are also shifting away from large buyout funds to firms targeting smaller deals and investments in faster-growing emerging markets, making the pie available for LBO firms in Europe and the U.S. even smaller.

“Firms at the larger end are taking one another on in fundraising, vying for scarce and selective capital,” said Mounir Guen, head of MVision Private Equity Advisers, which helps firms raise funds. “They’ll end up partially cannibalizing one another, hence take much longer to raise their funds and make it more challenging to reach their targets.”

Ramping Up

Leveraged-buyout firms are seeking more than $170 billion this year, more than what they sought in 2006 at the height of the private-equity boom, according to research firm Preqin Ltd. Nearly half of all private-equity fund managers plan to raise capital in 2011, according to a survey by Rothstein Kass, an advisory firm.

“Fund managers can influence the timing of their fundraising, and many of them delayed it last year,” said Helen Steers, head of Pantheon’s European primary funds group, a backer of private-equity firms. “Equally, they have been ramping up this year, because debt financing has come back allowing to fund deals, but also because they are more eager to come back to market now.”

In the U.S., KKR and Providence Equity Partners are seeking as much as $10 billion and $6 billion respectively. New York- based Warburg Pincus is preparing to raise a new fund after investing more than 80 percent of the $15 billion vehicle it raised in 2008, people familiar with the matter said last month.

Crowded Europe

Unlike KKR, which invests in broad range of companies, Providence specializes in media and communication deals, and Warburg’s investments range from backing early stage companies to buyouts of mature businesses.

Europe is more crowded. Five of the region’s seven largest firms are raising funds or are about to do so. BC Partners Ltd, which last year began marketing the first large European buyout fund since the financial crisis, has gathered more than 4 billion euros for its 6 billion-euro pool. Cinven Ltd., the London-based firm founded by the coal miners’ pension plan, is seeking 5 billion euros. EQT Partners AB, Scandinavia’s biggest private-equity firm, has secured 3.5 billion euros out of the 4.3 billion euros it’s seeking, people familiar with the matter said on July 5.

Officials at Warburg, KKR, and Providence declined to comment on fundraising. Officials at Permira, which outlined its fundraising plans to investors last month, Cinven, BC Partners, EQT and Apax also declined to comment.

‘Harder Than Ever’

“It’s a big issue if managers can’t get at least 50 percent from current investors,” said Richard Anthony, senior managing director at Evercore Partners Inc.’s private funds group, which helps firms raise money. “It’s hard to raise money when existing clients aren’t backing you, because sourcing new capital is harder than ever, even for more established funds.”

Almost 90 percent of limited partners won’t commit -- or “re-up” -- to some of their existing fund managers, partly because they don’t have enough capital available, a June investors survey by investment firm Coller Capital Ltd. showed. A fifth of firms may fail to raise new funds, investors polled by Coller predicted.

Sharing Clients

“We’ll very quickly see who the winners are,” said Rhonda Ryan, head of the European Private Funds group at Pinebridge Investments, which manages about $20 billion of private equity assets. “It will take longer before we see those who can’t reach their target, and for some funds, we’ll probably see some targets revised down over time.”

Firms are competing for the same clients. Apax and Permira in London share 26 investors across their funds, according to Preqin. California State Teachers’ Retirement System and Pennsylvania State Employees’ Retirement System are among 19 investors in both of their most recent funds. Apax and BC Partners share 23, including the Michigan Department of Treasury and Pennsylvania State. Canadian Pension Plan Investment Board, Canada’s largest pension plan, and New York State Teachers’ Retirement System are among 10 investors in both Permira and Cinven’s latest pools.

“Investors have finally woken up to the huge costs associated with having many relationships,” said Erik Hirsch, chief investment officer for Hamilton Lane Advisors, which helps clients with $89 billion select private equity funds. “They should have always chosen between A or B fund and not committed to both A and B. But there’s a lot more pressure now to choose one, which means fewer ‘yes’ votes.”

Dropping Blackstone

While still committing to large buyout funds, Pinebridge favors mid-market funds, Ryan said. Pantheon won’t commit to about 40 percent of the managers it invests with today, up from 30 percent before, Steers said.

Investors are already making choices affecting the most established firms. Pennsylvania State Employees’ Retirement System, a longtime backer of Blackstone Group LP’s buyout funds, hasn’t committed to the New York firm’s latest fund, which so far has attracted more than $16 billion.

Washington State Investment Board, one of the largest private equity investors, cut its allotment to KKR’s latest fund to $500 million from a $1.5 billion commitment to its predecessor. The Oregon Public Employees’ Retirement Fund has committed $525 million to KKR’s new pool, down from a $1.3 billion pledge in the firm’s 2006 pool.

Providence’s Niche

“Washington continues to look for balance in its investment selections,” said Liz Mendizabal, a spokeswoman for Washington State Investment Board.

Pamela Hile, a spokeswoman for Pennsylvania, and James Sinks, a spokesman for Oregon, didn’t respond to calls seeking comment.

Both pensions committed to Providence’s new fund, which has secured about $3 billion so far. Washington State raised its investment to $300 million from $250 million in the previous fund, according to the board’s minutes. Oregon allotted $150 million, half the amount committed previously.

“It’s clearly in the minds of some fund managers that you need to be differentiated to fundraise at the moment,” Ryan said.

--Editors: Edward Evans, Christian Baumgaertel

To contact the reporters on this story: Anne-Sylvaine Chassany in London at achassany@bloomberg.net; Cristina Alesci in New York at calesci2@bloomberg.net

To contact the editors responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net; Edward Evans at eevans3@bloomberg.net


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