Berkshire Partners raised 50% more for its new fund than for its predecessor as investors shift money to midsize private equity firms.
Berkshire closed the $4.5 billion fund on Wednesday, said two people with knowledge of matter, who asked not to be named because the information is private. The firm, whose previous seven funds gathered a combined $6.5 billion, has posted an annual internal rate of return of 30% after fees since opening in 1984.
New private-equity commitments were $127.6 billion in the first half, down 5.4% from the same period a year earlier and 63% less than in 2007, according to researcher Preqin Ltd. About half of midsize firms exceeded their fundraising targets, compared with about a quarter of their smaller and larger peers, according to the London-based firm, which categorizes mid-market managers as those focused on transactions ranging from $250 million to $1 billion.
“Big companies have less risk, but there’s less upside as well,” said William Atwood, executive director of the $11.6 billion Illinois State Board of Investment, Chicago. Private-equity investors “are being more selective about who they re-up with,” he said.
Blackstone Group, the world’s biggest private-equity firm, has gathered about $16 billion for its new fund, compared with the $21.7 billion it raised in 2007. KKR & Co., whose 2006 buyout pool totaled $17.6 billion, is seeking $10 billion from investors this year. Cerberus Capital Management is targeting $4 billion, almost half the size of its previous fund.
“In today’s market, the hated segment is the mega- buyout,” said Mario Giannini, CEO of Hamilton Lane Advisors, which advises clients on private-equity investments. “Investors look at that part of the market and look to the margins and think, ‘If there are economies of scale, why are the fees only 10% lower than the rest of the market?’ There’s a feeling that the mega-buyout fund managers aren’t investors. They’re money managers.”
Mega-buyouts are typically deals valued at more than $1 billion, according to Preqin.
Berkshire has invested in more than 100 companies, focusing on the consumer and retail industries, as well as business services, transportation, energy, industrial manufacturing and communications. Its deals have included Carter’s Inc., a maker of apparel for babies and children, and cosmetics brand Bare Escentuals Inc.
The firm’s best-performing fund was its third, which was started in 1992 with $168 million and generated an internal rate of return of 55% as of September, the people familiar with the performance said. Its $1.7 billion sixth fund has returned 24% annually since 2002. Jennifer Boyce, a spokeswoman for the firm, declined to comment.
ABRY Partners, a private equity manager that invests in media and communications firms, raised $1.6 billion earlier this year, after completing a $1.35 billion fund in 2008. Five out of the company’s six funds have generated returns of more than 20 percent, with the first fund exceeding 60 percent, according to an investor document obtained by Bloomberg.
Sideth Stegmeier, a spokeswoman for ABRY, declined to comment.
“When you look at firms like ABRY, they’ve played in a number of niches that have been productive over time,” said Ashbel Williams, chief investment officer of the Florida State Board of Administration, Tallahassee, which oversees $158.9 billion in assets and has invested in Berkshire and ABRY. “They’ve got various areas, either credit or equity, they’ve focused on. They’ve stayed with it. They haven’t strayed. They’re in markets that are not oversaturated with suppliers of capital.”
Investors are looking for fuller disclosure and more access to general partners, a trend that favors middle-market firms, said Tim Friedman, a spokesman for Preqin. About half of investors recently interviewed by the researcher said the best buyout opportunities are being offered by small to mid-market funds and they plan to invest in that segment over the next year.
“With the best mid-market funds versus the name-brand mega-funds, mid-market will come out on top,” Mr. Friedman said. “What we saw from mid-market firms is they weren’t as overexposed to the very highly leveraged deals that were done in the 2006, 2007, 2008.”