KKR (KKR) co-founders Henry Kravis and George Roberts are having a hard time raising enough money to meet an $8 billion target for their biggest buyout fund in six years. Since they started selling it more than 18 months ago, the North American XI Fund has gathered $6.2 billion, according to KKR’s earnings report for the third quarter, released on Oct. 26. The average time private equity firms need to raise money for a fund these days is 13 months, according to research firm Preqin.
The poor performance of KKR’s 2006 fund has hurt the company’s ability to attract money as fast as it had anticipated, according to a person with knowledge of the matter, who asked not to be named because talks with investors are private. The $17.6 billion fund has an average annual return of 5.4 percent, which trails the industry median of 7.6 percent, according to Preqin. Kristi Huller, a KKR spokeswoman, declined to comment.
Other firms are also having trouble convincing investors to contribute to buyout pools. About 260 funds are seeking to drum up a combined $219 billion globally, according to Preqin. Institutional investors such as public pension funds and university endowments have cut allocations to private equity since the financial crisis. “The traditional private equity investors such as U.S. pension funds have allocation constraints,” says Jeremie Le Febvre, founder of Singapore-based TBG Capital Advisors, which consults with firms. “This is making fundraising more difficult even for the most established brands, especially when they have relied on them too heavily.” The Washington state pension fund, one of the largest private equity investors, allotted $500 million to KKR’s latest fund, much less than the $1.5 billion it committed to KKR’s 2006 pool. The Oregon pension fund has pledged $525 million to KKR’s new fund, compared with $1.3 billion for the prior fund.
Investors are culling their relationships with private equity firms to focus on top performers, smaller funds and those that allocate more capital to faster-growing markets. “We’re seeing a divide in the market,” says Rhonda Ryan, who manages $1.3 billion in private equity assets at PineBridge Investments. “Those whose track record is not stellar are struggling.” Providence Equity Partners, which is seeking as much as $6 billion, told investors in a meeting earlier this month that it expects to close the fund at $5 billion, according to a person who attended the meeting but did not want his name used because it was a private gathering. Andrew Cole, an outside spokesman for Providence, declined to comment. London-based Permira, which is targeting €6.5 billion ($8.4 billion), has been on the road for more than a year. The firm has told investors it expects to secure about €3.3 billion by November at the earliest, when the firm may hold a so-called first-close that would allow it to start spending the money.
Advent International, which invests in mid-size companies in Europe and North America, has bucked the trend: It’s taken less than nine months to exceed the €7 billion target for its latest fund. The firm increased the maximum it could raise, known as the hard cap, to €8.5 billion from €8 billion in response to demand. The Boston-based firm’s previous fund, raised in 2008, generated a 13 percent annual return, net of fees, as of March, according to the Washington State Investment Board, higher than the median return for funds started that year. Fergus Wheeler, a spokesman for Advent, declined to comment.
KKR, whose 1989 takeover of RJR Nabisco catapulted it into the top ranks of the leveraged-buyout industry, has a reputation for pursuing big corporate takeovers. Among the deals done by the 2006 fund was the acquisition of TXU, later renamed Energy Future Holdings. KKR, TPG Capital, and Goldman Sachs Capital Partners acquired the power producer in 2007 for $43.2 billion in the largest leveraged buyout in history. The utility, whose long-term debt has soared to $42 billion, may need to restructure next year, according to Moody’s Investors Service (MCO).
Larger investors have become more skeptical about the potential for outsize returns on megafunds like KKR’s 2006 pool. For funds larger than $4.5 billion raised since 2004, returns have been below the industry average, according to Preqin. To broaden the range of its offerings for investors, KKR last year raised $1 billion to invest in growth companies in China. The firm is also seeking $6 billion for its second Asian fund and has raised two-thirds of that. At the same time, Marc Lipschultz, one of KKR’s most senior partners, has been trying to build an energy and infrastructure business.
Blackstone Group (BX) is also trying to shake the “mega” moniker. President Tony James told reporters during an Oct. 18 conference call that the firm is avoiding large deals in its newest fund. “We suspect that fundraising will be more difficult going forward,” James said. “There’s not the mind-set that prevailed in 2006 and 2007 where you can raise money as fast as you can possibly put it out.”