Mega-funds: the favoured few

Private equity fundraising is set for a record-breaking year in 2005, but the mega-LBO funds taking the industry into uncharted waters are members of a small but privileged elite. By Andy Thomson

It’s official: this year will be a record year for global private equity fundraising. The latest figures from Private Equity Analyst show that in the first nine months of this year, LBO funds garnered $70.1 billion (€59.0 billion) in fresh funding. With further significant fund closings expected in the final quarter, this leaves little room for doubt that the previous record annual total of $75 billion in 2000 will be blown away.

Blackstone’s Schwarzman: poised to head the elite

But hidden behind this staggering headline figure is an even more jaw-dropping statistic. Namely, a mere eight buyout funds – all raising more than $2 billion apiece – accounted for almost half the $70.1 billion total raised by 100 GP groups. This trend is confirmed by separate figures from Thomson Financial, which indicate that only 11 percent of 2005 LBO fundraisers have collected more than $1 billion, but that this 11 percent accounted for 63 percent of overall funds raised.

So who are the members of private equity’s exclusive club for the mega-rich? The roll call includes the likes GS Capital Partners, Warburg Pincus and Carlyle Group, which corralled in fresh funding commitments of $8.5 billion, $8 billion and $7.85 billion earlier this year. They will likely soon be joined by a number of other GPs currently knocking on LP doors: notably, Blackstone Group, with a colossal $12.5 billion target. Apollo Management ($10 billion) and Thomas H Lee Partners ($7.5 billion) also have their eyes on elite status.

Larger funds demand larger deal targets, which is why, at $11.3 billion, SunGard became the second-largest buyout in history when it was completed earlier this year. But horizons are now stretching further – as evidenced by the $15 billion financing package being put together for the buyout of Ford’s Hertz car rental division, a deal led by Clayton Dubilier & Rice, The Carlyle Group and Merrill Lynch Global Private Equity.

By ploughing their dollars into the new buyout elite and making such deals possible, limited partner groups have come under the spotlight. Critics might suggest they are being too passive – that they are in effect just following the herd. In so doing, are they failing to achieve sufficient diversification?

They might reasonably put forward the counter-argument that, yes, they are indeed being relatively passive – but what’s wrong with that? Returns from many large buyout funds in recent years appear to have more than matched expectations. Why spend considerably more time and resources conducting due diligence on niche mid-market and venture funds when the end result may be no better, or perhaps worse?

In addition, there has been much scrutiny of the club deal and the implications of a single limited partner group finding itself exposed to the same deal through a number of different funds. Interestingly, sources at Blackstone Group say that one of the happy side effects of raising a ‘mega-mega’ fund will be an ability to inject enough equity into large deals to avoid having to pool resources with rivals. ‘Going small’ is not the only way to achieve diversification – going even larger is another.