Private equity fund raising is back with a vengeance.
This year, 52% of venture capital firms worldwide plan to raise a fund before year end, according to a recent VentureOne/Ernst & Young report. Some 80 private equity funds are raising money or plan to do so within the next 12 months, looking for more than $85 billion in the United States and abroad, according to data from Probitas Partners, a San Francisco private equity placement agent.
Last year, an estimated $30 billion was raised by U.S. funds — almost half of the $65.7 billion raised in 2002, according to provisional statistics from the London-based private equity research firm AltAssets. Due to the final close in October of the Permira Europe III fund with 5.1 billion euros ($6 billion), European funds could have raised as much as 20 billion euros last year.
"Based on the last quarter, especially last month, I expect a significant increase in the number of funds organized," said Larry Rowe, partner with Ropes & Gray, a New York law firm that works with private equity firms.
While there are more funds coming to market, general partners expect it to be slow going because many investors already are overallocated to alternatives and investors are becoming more selective in choosing a fund. Many investors prefer smaller funds — those with less than $1 billion — feeling they can generate better returns, industry insiders say.
"2003 will be the trough of fund raising, and 2004 will increase from there," said Kelly DePonte, principal of Probitas Partners. No trouble
Nevertheless, many name-brand buyout firms are having no trouble raising large chunks of cash.
Texas Pacific Group, San Francisco, at the end of 2003 had an initial close with the $4.4 billion TPG Partners IV; the final close, with $5.3 billion, is expected in the first quarter. Among the investors that committed capital to the fund between October and December are the $56 billion Ohio Public Employees Retirement System, Columbus, which committed $100 million; the $54 billion Washington State Investment Board, Olympia, $175 million; the $72 billion New York State Teachers' Retirement System, Albany, up to $100 million; the $42 billion Pennsylvania State Employees' Retirement System, Harrisburg, up to $30 million; the $162.4 billion California Public Employees' Retirement System, Sacramento, $200 million; the $4.1 billion San Diego County Employees Retirement System, $10 million; the C$64.4 billion (US$50.3 billion) Canadian Pension Plan Investment Board, Toronto, US$100 million; and the $110 billion California State Teachers' Retirement System, Sacramento, $350 million.
Carlyle Group, Washington, closed its first dedicated Japanese buyout fund with about $470 million and is heading to market with a $3.9 billion Carlyle Partners II and the $3 billion Carlyle Europe Capital VII. However, Carlyle has been raising money for the Carlyle Japan Partners LP since 2001; CalPERS has committed $25 million to the fund.
By far, the largest fund to close was Permira Europe Fund III, which raised $5.4 billion, the largest European buyout fund closed in 2003. Among U.S. investors are Ohio Public Employees, which invested 50 million euros; the $29 billion Massachusetts Pension Reserves Investment Management Board, Boston, $85 million; the $42 billion Texas Teacher Retirement System, Austin, up to $70.5 million; the $27 billion Los Angeles County Employees Retirement Association, Pasadena, Calif., up to $89 million; and the $27.5 billion Colorado Public Employees' Retirement Association, Denver.
The market is expected to improve but still be challenging in 2004. Limited partners will be parsing out their allocations to fund managers that have the longest track records and upper quartile performance.
Still, a number of firms are expected to begin raising billions of dollars in the first quarter, Mr. DePonte said. For example, Hicks, Muse Europe II fund is seeking to raise $1 billion, and sources anticipate the fund to close by the end of 2004. Bain Capital, New York, is targeting a $3 billion fund and DLJ Merchant Banking Partners/Credit Suisse First Boston, New York, is launching a $5.3 billion fund.
And it's not just private equity funds that are in the market. Cerberus Institutional Partners, New York, is raising a $1.1 billion distressed debt fund. Already, CalSTRS has committed $100 million and Pennsylvania State Employees is investing up to $35 million in the fund.
"I feel much better about the market entering 2004 than I did 12 or 18 months ago," said George M. Jenkins, general partner with Apax Partners Worldwide LLP, New York. However, he added that he expects the funds to have a mixed reception by limited partners.
"My expectation is that we are seeing a lot of funds knocking on the door in 2004," Mr. Jenkins said. But fund managers that wait too long will find that institutional investors already have earmarked their private equity allocations, he added.
"It's not an easy process for anybody," Mr. Jenkins said. "There's probably a much stronger degree of ‘show me' from the limited partners side."
Limited partners are spending more time conducting due diligence and are shying away from first-time managers, he said. How long it will take firms to close funds in 2004 depends on a number of factors.
Six months would be too short a time and "anybody that takes two years (to close a fund) has a real issue," he said. (Probitas Partners data show the average fund raising now takes nine to 14 months.)
But Mr. Jenkins added: "I think there's money out there without question. Are people being very focused on what to do with it? Absolutely."
Mr. Jenkins declined to confirm reports that Apax executives are considering raising new funds in Europe and the United States.
Leaders of the National Venture Capital Association, Washington, expect highly selective fund-raising activity among institutional investors, according to a study released last month. Nevertheless, some venture capital managers are optimistic about their ability to raise funds in 2004. Altus Capital Partners Inc., Westport, Conn., just had a second closing of its $27.6 million private equity fund, the Altus Capital Partners SBIC fund, which will grow to $83 million with matching funds from the Small Business Administration, said Russell J. Greenberg, managing partner.
Although it took a year for Altus to raise the initial money from institutional investors, Mr. Greenberg said he expects to raise additional money, bringing the fund to $150 million by the second quarter.