Private equity's 'mega-fund' problem

Posted by Dan Primack

May 3, 2011 5:15 pm

Private equity's mega-funds have gotten a worse rap than they deserve. Even from the mega-funds themselves.

Years ago, most everyone in private equity aspired to be part of a mega-fund. You got invited to the best parties, had your choice of CNBC interviewer and could afford to buy just about any company that didn't rhyme with kugel. Plus, you raked in enough dough to make an NFL owner blush.

Today, however, "mega-fund" is a market obscenity. Those who never rose to mega-status jeer those who did, insisting that mid-market returns were always better anyway. Those who had caviar dreams now pretend that they never did, as if it was all just a giant misunderstanding. For example:

"Mega funds are actually engaged in mid-market buyouts. Most deals that are done are smaller deals. They are sub-$1billion. It's been that way not just post-crisis, but before the crisis and even in the market we find ourselves in now."-- Jonathan Nelson, CEO of Providence Equity Partners, speaking yesterday at the Milken Institute Global Conference.

"We've always focused on… medium-sized deals, more the mid-market deals. We think that's sort of the sweet spot where we can bring the operating platform, the clout, the leverage with lenders, the proprietary deal flow, the things like that, that only big firms can really -- it takes scale to have, but we apply that to the less competitive mid-market, and so our positioning is a little unique there. It's a big -- it's a big mid-market fund almost." -- Tony James, president of The Blackstone Group (BX), during an August 2009 earnings call.

To be sure, both Providence and Blackstone are mega-funds. Providence currently is investing out of a $12.2 billion fund raised in 2006, and reportedly is in market with a follow-up vehicle. Portfolio companies include SunGard, Univision and Warner Music. Blackstone is nearing the finish line on a new fund that has secured more than $15 billion in capital commitments. Portfolio companies include Celanese and Hilton. Even if a majority of their deals are for smaller companies, the majority of their dollars are with the larger ones.

Source: Coller Capital

All of this double-talk is a byproduct of private equity pros knowing their customers -- the institutional investors who fill their funds and pay their overhead (a.k.a. limited partners). These folks -- particularly some of the public pension systems -- have decided smaller is better. More

Tags: Blackstone Group, Private Equity, Providence Equity