Pension fund executives are carefully mulling over Hicks Muse Tate & Furst Inc.'s unusual offer to guarantee its investors a minimum 20% return on a $200 million portfolio of "new economy" companies that will be part of the buyout firm's Fund V.
Dallas-based Hicks Muse seeks to raise between $3 billion and $4 billion for the fund. But only the $200 million portfolio, known as HMTF Holdings, will be subject to the guarantee.
William F. Quinn, president of AMR Investment Services, the investment arm of American Airlines Inc., Fort Worth, Texas, is weighing whether to invest $50 million in Fund V.
American, with $6 billion in defined benefit assets, has done well with Hicks Muse in the past. "We have invested $120 million with them, spread between all four of their domestic funds and gotten average annual returns in the mid to high 20s, which exceeded our target of the low 20s," Mr. Quinn said.
Officials at the $177 billion California Public Employees' Retirement System, Sacramento, also are considering an investment in Fund V, said spokesman Brad Pacheco. "We're doing due diligence now, and haven't made a decision. It will be up to the board, if the staff recommends it."
Mr. Pacheco said CalPERS' officials view the Hicks Muse guarantee as positive. "They're looking out for investors and will take the hit themselves if the investments sour," he noted. The potential investment is expected to be discussed at CalPERS' December meeting. CalPERS, which has $7.5 billion in private equity investments, invested $100 million each in the firm's second and third funds, achieving an annualized return of 25.9% for Fund II and a 24.1% return for Fund III. The system did not invest in Fund IV, but would like to continue its relationship with what it considers a top buyout firm, Mr. Pacheco added.
Taking the long view
Jay Fewel, who oversees $4.5 billion in private equity at the $40 billion Oregon Public Employees Retirement System, Salem, said that he takes the long-term view and won't change the allocation at this point. "These companies are also taking their toll in the public markets, but we don't overreact to these moves. The system is in the early stages of looking at Fund V," he said. "We have to complete our due diligence first, but we also have other partnerships we have to get done." Mr. Fewel observed that the 20% guarantee on the early stage companies in the portfolio will be a benefit for limited partners.
Oregon invested $50 million in Fund II; $100 million in Fund III; and $200 million in Fund IV.
Potential investors were informed of the guarantee in a memo last week from Thomas Hicks, Hicks Muse's chairman. He also wrote that the firm was moving away from the new economy companies it had started investing in last year, and would focus instead on the "consumer branded, manufacturing and media sectors, which had been part of its traditional and very successful strategy."
"It has become a very competitive fund-raising market as we try to raise as much as we can," Mr. Hicks said in a conference call with investors last week.
Mr. Hicks explained during the call that his firm has stopped investing in the early stage companies that it backed last year. "The outlook for these companies is less certain than it was when we made these investments. The capital markets have changed since April," he said.
Many Internet companies that were to have gone into the new fund have done poorly, although two - Vetrix Corp. and The Realm.com - should do well because of their solid management teams and upside potential, Mr. Hicks said.
One private equity consultant, Kelly DePonte, chief operating officer at Pacific Corporate Group Inc., La Jolla, Calif., said he was taking a wait-and-see attitude on Fund V, until he does due diligence and learns more about the investments in the portfolio.
He added the fund-raising climate for private equity has turned very difficult because general partners now come back to raise money in a year or two after closing a fund, whereas they used to wait three to five years. In addition, said Mr. DePonte, they ask for double the amount that was committed for the last fund.
Richard Holbein is chief executive officer at Holbein Associates Inc., Dallas, the private equity consultant for the $8 billion Arkansas Teacher Retirement System, Little Rock, and the $14 billion Teachers' Retirement System of Louisiana, Baton Rouge. Both funds have signed on for Fund V, after investing in Hicks Muse's Funds III and IV. Mr. Holbein declined to specify the amounts they committed.
He isn't worried about buyouts. "This kind of upheaval increases good opportunities for private equity. I'm more concerned about venture capital because of the large amounts raised last year and how much of that may be revalued. "
