Don't bet that private equity fund raising will pause and catch its breath in 1997 after five years of increased commitments by pension funds, endowments and foundations.
It would be logical to expect a decline because the record amount raised in 1996 - $32 billion - was disproportionally attributed to the $5.7 billion closed by Kohlberg Kravis Roberts & Co., the $3 billion closed by Donaldson, Lufkin & Jenrette Inc. and the $1.2 billion closed by Hicks, Muse, Tate & Fursy Inc., according to Asset Alternatives Inc., a Wellesley, Mass., firm that tracks private equity investing.
Had KKR, DLJ and Hicks Muse not been so successful, commitments certainly would have decreased, according to Asset Alternatives. Those three firms won't be in the market for capital raising this year.
But there will be other megafunds in 1997.
"The pundits said for the past few years that the size of the funds would dry up because of fewer sponsors," said William Farrell, a managing director with Farrell Marsh & Co., a Greenwich, Conn., private equity placement agent. "The supply is coming out of the woodwork."
And the demand is there to sop it up.
This year could surpass last year because of the continuing pressure on pension funds to get money out the door and committed to private equity, said Gary Robertson, a vice president and head of alternative investments with Callan Associates, a Santa Monica, Calif., consultant.
"We did a survey," said Mr. Robertson. "Those in the market are planning to increase commitments by 40% in the next two years. Those not involved said they were going to start," he said. "It might slow if we have a bear market, but long term we expect it to grow."
Mr. Robertson noted that public pension funds from Colorado, Florida and Oregon have said they want to invest at least $200 million per partnership investment. Foreign capital is also fueling demand, said Charles Marsh, managing director of Farrell Marsh.
Denand won't abate even as return expectations are dropping. Private equity returns are expected to be more attractive than those from public securities, said Mr. Farrell.
Several private equity buy-out partnerships raising money in 1997 are seeking at least $1 billion, according to Messrs. Robertson and Farrell. These include Forstmann Little Equity VI L.P., with a $3 billion target; TPG Partners II L.P., $2.5 billion; Blackstone Capital Partners II L.P., $2 billion; and Lehman Brothers Capital Partners II, $1.5 billion.
Two other funds - Kelso Investment Associates VI L.P. and Bain Capital fund VI L.P. - are seeking $1 billion while two more - Charterhouse Equity Partners III L.P. and Freeman Spogli Equity Partners III L.P. - could easily exceed their $750 million target, according to information from Farrell Marsh & Co.
KKR Associates 1996 fund exceeded its target close of $2 billion by $3.7 billion, and DLJ's Merchant Banking Partners II fund doubled its $1.5 billion target.
General partnership fund-raising beat their targets by 32.4%, 23.2% and 18%, respectively, in 1996, 1995, and 1994, according to Farrell Marsh.
"We view private equity as a domestic emerging market," said Mr. Robertson. "It's growing in popularity."
The most popular fund in 1996 was the KKR Associates 1996 Fund L.P. The fund will pursue investments in management buy-outs and industry consolidations.
Pension funds investing with KKR are the Oregon Public Employes' Retirement System, the Washington State Investment Board, the State of Michigan Retirement System, the State of Wisconsin Investment Board, the Montana Board of Investments, the Minnesota State Board of Investments, the Illinois State Board of Investment, the New York Common Retirement Fund, the Massachusetts Pension Reserve Investment Management Board and the pension funds for the Aluminum Co. of America and Georgia-Pacific Corp.
The second largest fund of 1996 was the DLJ Merchant Banking Partners II, another corporate finance fund. The Los Angeles County Employees Retirement Association, Teachers Retirement System of Illinois and Pennsylvania State Employes' Retirement System were among its investors.
Investors with Hicks Muse Tate & Furst Equity Fund III L.P., which had the third largest closing in 1996, included the Oregon Public Employes' Retirement System and the pension fund for American Airlines.
Oaktree Capital Management L.L.C. closed on $947 million for two funds: OCM Opportunities Fund L.P. and OCM Principal Opportunities Fund L.P. Both funds are mining the distressed debt sector for opportunities, but are ranked as private equity funds.
"It's a stretch to call it private equity," concedes Howard Marks, chairman of Oaktree. "We try to create equity through our restructurings, but it is a misnomer."
OCM Opportunities, with $670 million, is a pure distressed debt fund that buys the debt of troubled companies and receives equity when the company is restructured, Mr. Marks said. OCM Principal Opportunities Fund, with $625 million, is a distressed debt-private equity hybrid. The fund seeks to obtain an influential or controlling equity position in companies mostly through distressed debt, he added.
Pensions & Investments learned that The Rhode Island Retirement Systems, Providence, and Los Angeles City Employees' Retirement System are investors in OCM Principal.
Madison Dearborn's Capital Partners II L.P. closed on $925 million in 1996. It will do a combination of buy-outs and growth equity, said John A. Canning, president with Madison Dearborn Partners Inc., Chicago.
The fund has $925 million in its coffers. Investors include the New York Common Retirement Fund, the Illinois State Board of Investment, Virginia Retirement System, San Francisco City & County Employees' Retirement System and Pennsylvania State Employes.
A corporate finance fund, Madison Dearborn will focus on four industries: communication operating companies, health care services, consumer distribution/retail and natural resources. Mr. Canning expects that with the success of fund raising, it will take longer to invest the assets. The partners are prepared to stop investing if valuations are too high, he said.
"It (stopping) is better than going ahead," he said. "We told people that, unlike our first fund, which took four years, this will take six" to invest all of its assets.
The TA Associates' TA/Advent funds, known primarily as a technology venture capital specialist, shifted focus and is a private equity corporate finance fund.
The TA/Advent VIII L.P., which closed on $808 million in 1996, will make three types of investments: unleveraged minority equity investments, leverage capitalizations and leverage buy-outs, said P. Andrews McLane, managing director.
The fund will invest only in profitable and established private businesses, said Mr. McLane. More than 50% of the investments will use leverage, he said.
Industries on which the fund will focus are: financial services, health care services, consumer products, media and business-to-business services, said Mr. McLane.
Boston Ventures Ltd. Partnership V raised $800 million. The partnership will pursue media and entertainment company transactions, according to Buyouts, a newsletter that tracks the transactions.
The $4.4 billion Rhode Island Retirement System committed to Boston Ventures, said Steve Klamkin, a spokesman for the system.
Vestar Capital Partners closed on $763 million for,its Vestar Equity Partners II L.P. Investors in the corporate finance fund that specializes in middle-market buy-outs and recapitalizations include Washington State, Pennsylvania State Employes, the University of Washington endowment and San Francisco City & County.
Carlyle Partners II, sponsored by Carlyle Group L.P., closed with $685 million in 1996 and has more than $1.3 billion to invest. The fund will pursue a corporate acquisition strategy which will make controlling and strategic minority investments. Carlyle's first fund was only $100.5 million, said James Griffin Jr., vice president.
The partners raised more than 10 times the amount of the first fund because its deal flow had increased and they plan to do bigger deals - if it fits the strategy, Mr. Griffin said.
"A lot of people raising larger funds are doing larger deals," Mr. Griffin said. "Our investment strategy hasn't changed. If we see a larger deal that makes sense, we will do it. But we will continue to what we did in fund one."
Morgan Stanley Venture Partners III closed $275 million. Its investors include the pension fund of Brooklyn Union Gas Co. and General Motors Investment Management Co. the investment arm of General Motors Corp., according to Private Equity Analyst.
The fund will focus on late-stage health care and technology companies.
Golder, Thoma, Cressey, Rauner Fund L.P. will invest in companies with consolidation potential. The fund closed on $521 million in 1996. Its investors include Minnesota Mining & Manufacturing Co., Illinois State Board, Pennsylvania State Employes' and Minnesota State Board of Investment.
The high level of investments in buy-out funds will translate into a lot of acquisitions in 1997, said Thomas Lynch, head of private markets group with Wilshire Associates, Pittsburgh.
"If you look at the past three years, there is a high correlation of commitments to private equity, particularly buy-outs, and the merger and acquisitions business," Mr. Lynch said.
There are concerns that the large amounts of money may bid up the price of acquisitions, said Mr. Lynch. But it would be a mistake for an investor to walk away from the private equity sector, he said. Wilshire recommends that investors take a value-oriented approach.