Although most of the top-performing firms in the leveraged buyout world are raising or are expected to raise some of the largest funds in recent years, institutional investors might have a hard time getting access to those funds.
"There are (fewer) spots for limited partners, even in their historical general partner relationships," said John E. Buehler, managing partner at Energy Investors Funds Group LLC, a private equity firm with offices in San Francisco, Boston and New York.
"2002 represented a substantial diminution of private equity, and now there is more capital and fewer opportunities," Mr. Buehler said.
Limited partners say there might be a number of middle-market funds raising money right now, but few are attractive.
"It's just a matter of institutional quality," said Christopher Wagner, senior investment officer of alternative assets for $29 billion Los Angeles County Employees' Retirement Association, Pasadena, Calif. "Funds that are institutional quality that are less than $1 billion are not as plentiful as ones that are over $1 billion." LACERA's target for alternative investments is 7%, or about $2 billion. It had a $1.4 billion private equity portfolio as of March 31, the most current data, Mr. Wagner said.
"You have some of the same dynamics taking place in the buyout world as the venture capital world," said Josh Lerner, the Jacob H. Schiff Professor of Investment Banking at Harvard Business School, Boston. "In venture, everyone's known who the good groups are, but it's difficult to get access."
The same is now true with buyout funds. Many of the top-tier groups have had the same limited partners for years and there are now waiting lists to get into the funds, Mr. Lerner said.
"We've seen this really in the hot buyout funds, which are middle-market groups that had good returns and differentiated strategies," he said. "There's been a real frenzy to get in."
Sun Capital Partners Inc., a private equity firm in Boca Raton, Fla., is an example. Sun executives are raising their fourth fund, with a $500 million target, and that fund is expected to be oversubscribed, Mr. Lerner said. Sun Capital has had a strategy of doing different kinds of restructurings of troubled companies, some in bankruptcy. The previous fund, which closed in January 2003, was a participant in the $1.65 billion acquisition of Mervyn's, a department store chain based in Hayward, Calif., from Target Corp. Other investors were Cerberus Capital Management LP, New York, and a real estate joint venture of Philadelphia-based Lubert-Adler and Chicago-based Klaff Partners LP.
Mr. Lerner said Sun Capital has had "an enviable track record in terms of how well they have done." As a result, top-tier limited partners have been fighting to get in. Among Sun Capital's investors are the endowments of Yale University, New Haven, Conn. ($11 billion) and the University of Notre Dame, Notre Dame, Ind. ($2.6 billion).