Berkshire Partners Said to Get More as Big Funds Settle for Less

Berkshire Partners LLC, the buyout firm that manages money for Harvard, Yale and Stanford, raised 50 percent more for its new fund than for its predecessor as investors shift money to midsize firms.

Berkshire, which has invested in more than 100 companies on behalf of endowments and pension funds, closed the $4.5 billion fund yesterday, said two people with knowledge of matter, who asked not to be named because the information is private. The Boston-based firm, whose previous seven funds gathered a combined $6.5 billion, has posted an annual internal rate of return of 30 percent after fees since opening in 1984.

New private-equity commitments were $127.6 billion in the first half, down 5.4 percent from the same period a year earlier and 63 percent 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 Illinois State Board of Investment, which manages $11.6 billion in pension assets for state lawmakers, judges and employees. Private-equity investors “are being more selective about who they re-up with,” he said.

Private-equity funds combine debt with money from endowments, foundations, pensions and wealthy individuals to buy stakes in companies or acquire them. The firms usually take fees equal to about 2 percent of fund assets and 20 percent of investment profits.

Investors Get Selective

Mid-market firms such as Berkshire, American Securities LLC and Abry Partners LLC are attracting money more quickly than their larger and smaller counterparts. It took an average of 17 months for midsize managers to complete fundraising from 2009 through March 2011, compared with more than 20 months for small and large firms, Preqin data show.

Private-equity investors, known as limited partners, began committing fewer dollars to the largest funds and culling the number of managers they do business with after the buyout boom ended in mid-2007 and profit distributions dried up. LPs are also allocating more money to firms that focus on smaller transactions and faster-growing emerging markets.

Blackstone Group LP, 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 LP is targeting $4 billion, almost half the size of its previous fund.

‘Hated Segment’

“In today’s market, the hated segment is the mega-buyout,” said Mario Giannini, chief executive officer of Hamilton Lane Advisors, a Bala Cynwyd, Pennsylvania-based firm that 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 percent 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 was co-founded by a group including Brad Bloom and Richard Lubin, who previously worked at Thomas H. Lee Partners LP in Boston. The firm 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.

55% Return

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 percent as of September, the people familiar with the performance said. Its $1.7 billion sixth fund has returned 24 percent annually since 2002. Jennifer Boyce, a spokeswoman for the firm, declined to comment.

American Securities, which is targeting $3 billion, may raise as much as $4 billion for its sixth fund, up from the $2.3 billion gathered in 2008, according to two people familiar with the firm. Started in 1947 as the family office of William Rosenwald, an heir to Sears Roebuck & Co. fortune, New York-based American Securities took on outside investors in the late 1980s, according to its website.

The firm has generated returns of 23 percent a year after fees since it formally began its private-equity program in 1994, a person familiar with the matter said. Anne Board, a spokeswoman for American Securities, declined to comment.

Niche Markets

Abry Partners, a Boston 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 State Board of Administration of Florida in Tallahassee, which oversees a $128 billion pension system 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.”

More Disclosure Sought

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,” 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.”

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