In this fourth annual ranking of the world’s largest private equity firms you will find many familiar names and placements but also some notable shuffling in the ranks, reflective of a dramatically changed fundraising market as well as the rise of specialist and emerging markets strategies.
Having launched in 2007, the PEI 300 has sized up private equity direct investment programmes during private equity’s biggest boom as well as during the sharpest market decline in the history of the asset class. The stability of many of the names on this list across those years is owed largely to the long-term structure of private equity partnerships. Firms that raised a great amount of capital leading up to 2008, for example, have for the most part retained their standing in the market because much of that capital raised in better times remains under management. But the year 2009 represented a very weak fundraising market indeed, and the falling tide lowered many boats. For the first time, the five-year fundraising total of the PEI 300’s top 50 has shrunk.
That said, there is an impressive collection of upwardly mobile GPs and newcomers in the PEI 300, showing that demand for fresh private equity talent has remained strong even through the Great Recession. Going forward, expect to see a changing of the guard play out in slow motion as the strongest franchises gradually win commitment dollars away from firms whose best years lie in the past.
Ask the man on the street which is the largest private equity firm in the world and, if you’re not first met with a blank stare, you may hear KKR, Carlyle Group, Blackstone or TPG. Indeed, most industry practitioners would offer the same guesses. But this year they’d all be wrong: private equity’s “silent giant”, Goldman Sachs’ Principal Investment Area, has catapulted to the No. 1 spot on the PEI 300.
The Wall Street behemoth has raised nearly $55 billion for direct private equity investment over the past five years, up from the $49 billion that earned Goldman the No. 2 spot on last year’s list. The firm’s figures have remained high in part due to the impressive $13 billion it raised for its fifth mezzanine fund (a strategy that is counted in the PEI 300 methodology). And, unlike some other firms that raised large buyout funds in 2007, Goldman has not downsized its $20.3 billion GS Capital Partners VI, which is silently active all over the planet.
Just how long the House of Goldman will remain a private equity powerhouse, however, remains unclear, for the proposed “Volcker Rule” being debated by Congress would prevent bank holding companies from owning proprietary private equity funds, among other things. Goldman’s Principal Investment Area would only be able to thwart the proposed rules by throwing away its bank holding company status, which it reluctantly converted to in September 2008 while under intense pressure from the Fed. If the proposal passes and Goldman remains a bank holding company, the private equity market would be bracing for one of the biggest-ever spin-outs.
Diversify and conquer
KKR and Apollo are proliferating funds ahead of listings
Two of the biggest private equity firms in the PEI 300 – Kohlberg Kravis Roberts and Apollo Global Management – took further steps toward listings on the New York Stock Exchange this year.
Apollo filed documents with the US Securities and Exchange Commission in March for an initial public offering of up to $50 million. Apollo, led by Leon Black, currently has about 36 million shares listed on a private exchange run by Goldman Sachs.
Part of what Apollo is promising its public investors is continued success securing huge amounts of institutional capital. Two of Apollo’s biggest shareholders are the California Public Employees’ Retirement System and the Abu Dhabi Investment Authority, both of which invested a total of $1.2 billion in Apollo in 2007. In going public, Apollo will need to balance the expectations of it shareholders against a growing insistence among its LPs that fees be trimmed. At press time Apollo had agreed to concessions on the fees CalPERS pays the firm for management of certain separate accounts, an important growth area, according to a letter Black sent LPs.
Ahead of its own planned listing on the NYSE, KKR has been expanding into several separate businesses areas. The firm historically pursued various strategies using capital from its main private equity funds, but has in recent years been moving toward separate funds for different strategies. KKR is raising an infrastructure fund, and has also created a separate distressed investing team that will focus on distressed debt, bankruptcy loans and rescue financing. The firm also has been targeting between $1 billion and $3 billion for a mezzanine fund, which will invest globally in larger companies through senior notes, subordinated debt and preferred stocks.
Perhaps these firms suspect that the era of “one giant fund” may have passed, but a new era of “several very large specialist funds” has only just begun.
Rise of the operators
It’s prime time for Clayton Dubilier & Rice
Private equity limited partners are now more likely than ever to say they want real operating talent in their private equity firms, in addition to “financial engineering”. This marriage of skill sets has been in place at Clayton Dubilier & Rice since 1978. No doubt CD&R’s recent track record of success together with its sought-after firm structure enabled the firm, in the middle of the worst fundraising market in a generation, to collect $5 billion for its eight buyout fund last year.
The firm sits at number 18 on PEI’s list of the top 300 private equity firms, having raised around $11.7 billion over the past five years. CD&R is one of only several private equity firms to have risen for three consecutive years up the PEI 300 rankings.
CD&R kept busy on the deal front last year, inking a £390 million (€443 million; $597 million) buyout of London-based used car dealership BCA from Montagu Private Equity. During the course of the year, the firm also invested in JohnsonDiversey, a provider of cleaning products, and NCI Building Systems, a maker of metal products for the building industry.
In April, the firm hired Alan Lafley, former CEO, president and chairman of Procter & Gamble as a special partner to provide advice to the firm’s full-time operating partners. Lafley joins a roster of special partners that includes Jack Welch, who once headed General Electric, and Edward Liddy, former CEO of Allstate who also worked for as time as interim head of American International Group during its restructuring.
Donald Gogel is the president and chief executive officer of the firm, while Joseph Rice remains chairman.
LPs like Oaktree’s style
It’s not surprising that Howard Marks-led Oaktree Capital Management has moved up the PEI 300 ranks to 24 from 37: the firm has seemingly been in perpetual fundraising mode for the last several years, raising capital for a wide range of strategies that have especially been in favour with LPs over the past few years.
Oaktree also recently began collecting commitments for its latest energy-focused private equity fund, carrying a reported target of $800 million and a $1 billion hard-cap. Some readers may not realise that Oaktree has been targeting the energy sector since 1999 in partnership with GFI Energy Ventures, a Los Angeles-headquartered private equity firm it quietly absorbed in mid-2009. The pair jointly raised $454 million for power-related deals in 1999, and in 2005 closed their second fund just north of $1 billion.
What fundraising slump? These first-timers raised billions
Several first-time fund managers found their way on to the PEI 300 this year, underscoring the fact that limited partners are still willing to put their faith in the right first-time teams targeting the right strategy at the right time.
The four firms with debut funds on the list this year are Mount Kellett Capital, with $2.5 billion for debt investments; Pine Brook Road Partners, which collected $1.4 billion; Huntsman Gay Global Capital, with a $1.1 billion debut fund; and Hudson Clean Energy Partners, which collected about $1 billion.
Hudson closed its fund in December. The firm was founded in 2007 by Goldman Sachs US alternative energy chief Neil Auerback. John Cavalier, former vice chairman of Credit Suisse’s investment banking department, is co-managing partner of the firm.
Huntsman Gay was formed by Utah industrialist Jon Huntsman and former Bain Capital managing director Robert Gay. The firm’s managing directors include Steve Young, formerly the quarterback of the San Francisco 49ers, the US professional football team.
Pine Brook Road Partners was formed by chief executive officer Howard Newman, who spent 22 years at Warburg Pincus. Other managing principals at the firm include Joseph Gantz, Mike McMahon and William Spiegel.
Finally, Mount Kellett Capital was founded by the former head of the special situations group for Goldman Sachs, Mark McGoldrick. Mount Kellett was targeting $5 billion but as the fundraising environment grew more difficult, the firm lowered its target.
First-time funds will have an especially hard time in the market today, but some can attract capital from institutions as long as the principals individually or collectively can show a very compelling track record.
The opposite of fundraising
Some GPs downsized their funds to free LPs from large commitments
The financial crisis has changed this trajectory definitively and various factors have conspired to mean that some funds were either too big for the market or too big for their investors (or both) and have been scaled back. Members of the PEI 300 who have shrunk funds in size had different reasons for their reductions, differing experiences during the negotiation process and vastly different results.
Arguably the most significant reduction would be that of Candover Partners’ 2008 buyout fund. It had raised €3 billion on its way to a target of €6 billion, when its listed parent company and cornerstone investor revealed that its commitment – all €1 billion of it – would have to be withdrawn. The remaining LPs subsequently voted to terminate the fund’s investment period and left it with commitments totalling €100 million to service its one portfolio company, oil and gas business Expro. As a result Candover slips in the PEI 300 from 39 to 68.
The fate of PAI Partners’ fifth fund was only slightly less dramatic. The shock departure of chief executive Dominique Megrét, and his hasty replacement with Lionel Zinsou, led to a protracted period of negotiation while LPs debated what should become of the €5.35 billion fund. Ultimately the fund was slashed to €2.7 billion.
TPG cut the size of its financial services-focused fund because the federal government has moved into the space and taken away some opportunities that had existed. It also sought to give its limited partners some relief in its main fund and Asia by giving investors the option of reducing their commitments by up to 10 percent.
Unleashed in the East
Firms based in Asia are growing in prominence
The growing stature of Asian firms within the private equity landscape is reflected in the shifting make-up of the PEI 300. There are now 27 Asian firms on the list, rising from 20 last year.
Newcomers to the list include CITIC Private Equity Funds Management, which came in at number 207 on the back of its record-breaking RMB9 billion (€972 million; $1.3 billion) fundraise earlier this year.
Also debuting is Hong Kong-based private equity start-up Primus Financial Holdings, which raised $1.2 billion from high-net-worth Asian investors for its financial services-focused buy-and-build investment strategy. Primus came in at number 232.
Only one Asian firm dropped off the board this year. Hong Kong-based CLSA Capital Partners, which last year ranked number 237 with $1.1 billion in fundraising under its belt.
However, the growing number of Asian private equity funds in the PEI 300 has yet to translate into a noticeable difference in the proportion of funds raised attributable to Asian funds.
Together the 27 Asian firms on this year’s list have raised a total of $54.7 billion over the past five years, or 4.2 percent of the PEI 300 total. This compares to the $45.7 billion combined fundraising total of last year’s 20 PEI 300 Asian firms, which accounted for 3.4 percent of the fundraising total.
Australia saw the number of its firms in the list edge up from four to five this year, with the addition at number 143 of CHAMP Private Equity, which has raised $1 billion towards its latest buyout fund, with a final close expected later this year.
The number of firms from the Middle East and North Africa, however, remained constant at seven, with only some shuffling in the line-up. For example, Dubai International Capital (last year’s number 128) has been replaced by EFG-Hermes Private Equity (this year’s number 283).
Rules of the game
What the PEI 300 does and does not measure
As we ask each year — would you believe that ranking 300 private equity firms by size is not an easy task?
First one needs to define “private equity” and “size”. Then one needs to gather accurate capital-formation information on hundreds of firms in what is among the most opaque markets in the world.
The result of this hard work is the PEI 300, an annual ranking conducted by Private Equity International.
In compiling the rankings, we are certain that we missed some important details, but we are equally certain that we exhausted every available resource in sourcing the best information. Private equity remains a non-transparent asset class, but it is getting more transparent with each passing year. We therefore believe that the PEI 300 is the authoritative guide to the most important investment firms in the global private equity market.
A firm’s rank among the largest 300 private equity firms in the world is determined by how much private equity direct-investment capital that firm has raised over a roughly five-year window ending at our press date last month.
WHAT IS THE PEI 300?
The PEI 300 is a ranking of private equity firms globally by size. It is the only apples-to-apples comparison of dedicated, direct-investment private equity programmes. The rankings began in 2007 as the PEI 50 and was expanded to the PEI 300 in 2009 due to demand for more information about private equity firms globally.
The PEI 300 is not a performance ranking, nor does it constitute investment recommendations. The PEI 300 includes private equity firms with varying structures and strategies around the world. While the list is mostly made up of private equity firms that manage private equity limited partnerships, it also includes firms with multiple strategies and business lines, and firms with publicly traded vehicles.
However, only a defined type of private equity capital is counted in determining the PEI 300 rankings, as described below. The PEI 300 only measures capital raised or formed within a five-year window spanning from 1 January 2005 until 22 April 2010. Last year’s rankings were also drawn from a 64-month window, but of course last year the window started on 1 January 2004 and ended on 15 April 2009.
Where two firms have raised the same amount of capital over this time period, the higher PEI 300 rank goes to the firm with the largest active pool of capital raised since 2004 (i.e., the biggest single fund). If there is still a “tie” after taking into account size of single fund, we give greater weight to the firm that has raised the most capital most recently.
In coming up with our key “2010 PEI 300 Five-Year Fundraising Total” figures, upon which the PEI 300 rankings are based, we rely on the most accurate information available. We give highest priority to information that we receive from or confirm with the private equity firms themselves, always on background. When the private equity firms themselves confirm details, we still seek to “trust but verify”.
Some details simply cannot be verified by us, and in these cases we defer to the honour system. In order to encourage cooperation from private equity firms that might make the PEI 300, we do not disclose which firms have aided us on background and which have not. Lacking confirmation of details from the firms themselves, we seek to corroborate information using any available resources, including the firms’ own websites, press releases, news reports, third-party databases, limited partner disclosures, etc.
To help answer this question – how much private equity capital has the firm raised since 1 January 2005? – we needed to set some definitions:
“Private equity”: The definition of private equity for the purposes of the PEI 300 means capital raised for a dedicated programme of investing directly into businesses. This includes equity capital for diversified private equity, buyouts, growth equity, venture capital, turnaround or control-oriented distressed investment capital, and mezzanine debt. Our rankings do not take into account funds of funds capital, capital raised for primarily real estate strategies, hedge fund capital, infrastructure and debt capital.
“Capital raised”: This means capital definitively committed to a private equity direct investment programme. In the case of a fundraising, it means the fund has had a final or official interim close after 1 January 2005. We count the full amount of a fund if it has a close after this date. We also count the full amount of an interim close that has occurred recently, even if no official announcement has been made. We also count capital raised through other means, such as LP co-investment vehicles, deal-by-deal LP co-investment capital, publicly traded vehicles and earmarked annual contributions from a sponsoring entity, when we are able to access this information. Where capital is raised in partnership with an affiliated entity, we take into consideration the economic relationship between the two entities, as well as how the fundraising was marketed to investors.
We count mezzanine debt raised by firms that are primarily engaged in private equity investing. Mezzanine debt frequently involves warrants for equity stakes, and has historically been counted alongside buyout capital by industry media and data services groups.