July 16 (Bloomberg) -- Madison Dearborn Partners LLC, one of the private-equity firms buying BCE Inc. for a record $51 billion, has raised less money than planned for a new fund as a slowing economy cuts profits at companies it has taken private.

Investors have committed about $4 billion, less than half the $10 billion Madison Dearborn set out to gather earlier this year, according to two people familiar with the matter. The Chicago-based firm had aimed to pull in as much as $5 billion by now, said the people, who asked not to be identified because the fund is private.

``This is a difficult environment,'' said William Atwood, executive director of the Illinois State Board of Investment, which will put $35 million into the fund, the same as it invested in Madison Dearborn's prior $6.5 billion pool. Pension- fund managers ``are definitely rethinking asset allocation.''

Madison Dearborn, whose chief executive officer John Canning Jr. stepped down in November, has struggled with deals including Yankee Candle Co. and Nuveen Investments Inc. Pierre Foods Inc., a Cincinnati-based supplier of pre-cooked meats and ready-to-eat sandwiches, filed for bankruptcy protection yesterday. Madison Dearborn invested $142 million in equity when it bought Pierre in 2004.

``We continue to fund raise and maintain an active, productive dialogue with our current and prospective limited partner investors,'' Madison Dearborn spokesman Chuck Dohrenwend said. ``We are not able to comment on specific aspects of the fund-raising process.''

The firm distributed $1.5 billion to investors in the first quarter of this year and about $7 billion during the past four years, Dohrenwend said. The new fund will be its sixth.

Yankee Candle Downgrade

A U.S. economy on the brink of recession is hurting profits and making it harder for LBO companies to pay down the debt.

Last month, Moody's Investors Service lowered its rating outlook for Deerfield, Massachusetts-based Yankee Candle, which Madison Dearborn bought for $1.4 billion in 2007. Moody's, which cut the rating to negative from stable, cited the scented-candle maker's reliance on sales to Linens 'N Things, the Clifton, New Jersey housewares retailer that went bankrupt in May; the increased debt load from the buyout; and negative trends in the retail business.

``Yankee Candle would say it makes an affordable luxury,'' Scott Tuhy of Moody's in New York, said in an interview. ``In this economy that will be tested.''

Fund Headwinds

Last year, Madison Dearborn spent $5.75 billion on Nuveen Investment in the largest-ever buyout targeting an asset manger, according to financial-research firm Jefferies Putnam Lovell. Nuveen said May 15 its first-quarter profit dropped 9 percent and assets under management fell 7.8 percent to $153 billion.

``All fund managers are facing headwinds now that they weren't in June of last year,'' said Benjamin Phillips of Jefferies Putnam Lovell in New York. ``Nuveen is one of them.''

Overall, the firm's portfolio companies posted profits ahead of Madison Dearborn's targets last year and are ahead of plans this year, as well, said a person familiar with the funds' performance who declined to be named because the results are private.

The firm delivered average annual returns of about 28 percent and twice the capital committed for its fourth fund, launched in 2000, according to data on the California Public Employees' Retirement System Web site.

Announced private-equity deals, down more than 70 percent this year, are a casualty of the credit crisis that has cost Wall Street firms more than $400 billion in writedowns and left investment banks skittish about committing financing for new transactions. Still, some of the largest private-equity firms, including Blackstone Group LP and Carlyle Group, have sought to raise their biggest funds as their investors hesitate.

Blackstone, Carlyle

Blackstone raised a record $21.7 billion last year and almost immediately went back to investors with plans for a fund of similar size. The New York-based firm, run by Stephen Schwarzman, delayed the first close of the pool earlier this year.

Washington-base Carlyle, the world's second-largest private-equity firm by assets, pushed back the final close of a $15 billion fund by six months to the end of this year.

Fund-raising at Madison Dearborn and other firms is being hurt by the so-called denominator effect. When the public markets are suffering -- the Standard & Poor's Index is down 16 percent this year -- the value of an institutional investor's holdings fall. That means the percentage allocated to private- equity may rise even if it remains steady, pushing to the limit a fund's proscribed allocation limits.

Smaller Commitments

``Commitments to some funds are somewhat smaller than in the past,'' said Pamela Hile of the Pennsylvania State Employees' Retirement System, which committed $50 million to Madison Dearborn's new fund after investing between $75 million and $90 million in prior funds.

The firm earlier this month salvaged its largest outstanding buyout, the record $51.8 billion purchase of Canadian phone company BCE Inc. with Ontario Teachers' Pension Plan and Providence Equity Partners Inc., by agreeing to bank's requests to extend the closing date by three months to Dec. 11, and increasing its interest payments.

That compromise followed a heated contest between the buyers and bondholders that had to be resolved by Canada's Supreme Court.

To contact the reporters on this story: Jason Kelly in New York at jkelly14@bloomberg.net; Jonathan Keehner in New York at jkeehner@bloomberg.net

Last Updated: July 16, 2008 14:24 EDT