NEW YORK - Concerned about the amount of money going into private equity funds? You shouldn't be, according to John Castle, founder of Castle Harlan Inc., a New York merchant bank that does buy-outs.
Private equity partnerships raised $32 billion last year, the fifth consecutive year of increased commitments. Several observers expect 1997 to match or exceed that amount, even as alarms are being sounded that there will be too much money in the market.
Private equity fund-raising has totaled about $150 billion since 1980, the bulk of it raised in the last five years, said Steven Galante, president of Asset Alternatives, Wellesley, Mass., which tracks private equity fund raising.
General partners have returned about $65 million; half of the balance is invested, estimates Mr. Galante.
Mr. Castle believes the private equity market easily could accommodate almost 1,000 times the amount raised since 1980, or $1 trillion.
Self-serving? Perhaps. But Mr. Castle, showing no visible signs of humor, made a cogent argument.
"There are $10 trillion in public stocks; $7 trillion listed on the New York Stock Exchange, $3 trillion on the others," Mr. Castle said.
"If you look at our economy and the companies that need to go through a public transition, there are $2 trillion to $3 trillion of private enterprises not owned by public companies," he said.
"So $100 billion to invest in this is small, and $1 trillion is not crazy," said Mr. Castle.
"Out of $18 trillion (including government and corporate debt) in publicly traded securities, the idea that $1 trillion should go to private enterprises doesn't look to me like a misallocation of financial resources," he said.
"Returns would come down a bit, but they would be better than the public markets."
Heritage Fund at $380 million
BOSTON - The Heritage Fund II L.P. closed recently, raising a total of $380 million that will be invested in the fund's "Private IPO" strategy.
Heritage Partners Inc., sponsor of the fund, invests exclusively in family-owned companies with succession issues, said Peter Hermann, a general partner.
Pension funds and endowments that have invested in the most recent offering are Mead Corp., Frontier Corp., Corning Inc., Unisys Corp., the New York Common Retirement Fund, the Virginia Retirement Systems, Princeton University, the University of Richmond and the Church Pension Fund & Affiliated (Episcopal).
The firm's partners "stumbled" into the family succession niche in 1987, while working at the Bank of Boston with the bank's business clients, said Mr. Hermann.
The dilemma for many family-business owners is a way to cash out of their business without selling it or going public and losing control, he said.
"The 'private IPO' is an alternative to going public," said Mr. Hermann. "The owners get to cash out, but keep control of the business and grow it.
"They want to be a partner and not an employee."
The initial effort was funded exclusively by the bank and managed by Mr. Herman and his partners, Michael Reichert and Michael Gilligan. The bank invested $51 million in 15 companies between 1988 and 1993 and generated annualized returns in excess of 80%.
"In our deals, the family comes up with one-third of the equity," said Mr. Hermann. "We come up with two-thirds with a combination of common and preferred stock.
"The board is structured so that they keep control of it. But once we get on the board, we expect to be treated like a partner.
"It's not the most glamorous niche, but it's a great place to be."
Messrs. Hermann, Reichert and Gilligan left Bank of Boston in 1993 and sponsored their first fund in 1994, raising $150 million. That fund is fully invested.
Demand to invest in the second fund was so great, the sponsors trice raised the maximum.
"Originally we wanted to go out for $250 million," said Mr. Hermann. "We raised it to $300 million, $350 million and finally decided to cap it at $380 million."
Bank of Boston has invested in both Heritage funds.
Wand starting on 2nd portfolio
NEW YORK - Wand Partners Inc., a middle-market buy-out fund, has started raising money for its second fund, Wand Equity Portfolio II.
The fund will be limited to $250 million, and is about 50% subscribed by investors in the first fund.
Investors in the fund include University of Texas, Storebrand, a Norwegian insurance group, PennCorp Financial Group Inc., Allstate Insurance Co. Inc., Banc One Capital Corp. and National Bank of Kuwait, said Bruce Schnitzer, chairman.
Wand focuses on insurance/specialty finance, marketing services and software and direct marketing/specialty retail. The funds also co-invest with other fund sponsors.
Wand Equity Portfolio I has produced a 36% annual net return on its full-cycle transactions, said Mr. Schnitzer. "Most of the remaining portfolio companies are now publicly traded, and we believe the annual net return to investors in Wand I will be in the order of 30%," said Mr. Schnitzer.
The first closing of the fund is scheduled for late August.
A date has not been set for the final close.
