10 Fundraisings to Watch in 2014

Many hopeful GPs will be attempting to raise private equity funds in 2014. What are their chances of success? Anyone raising a fund this year is wise to pay attention to the fundraising landscape generally, and certain bellwether fundraisings in particular, to get a better sense of their own chances of success.

According to Hamilton Lane, the number of PPMs in circulation today is at or near a post-recession high, with some 650 GP groups on the fundraising trail. Not all of these groups will raise capital. In fact, the odds are against many of them.

That LPs are reducing the number of relationships they have with private equity firms is a well established fact. A great number of mighty mega-firms will continue to exist, but will manage smaller follow-on funds. This shouldn’t be surprising—the league table of the largest private equity firms is always changing. Some firms that were dominant in the 1980s and 1990s no longer exist. It should therefore be assumed that some firms that dominated in the 2000s will not in the unfolding current decade.

The biggest firms, however, have advantages not enjoyed by up-and comers—strategic diversity and welloiled IR functions. Most of the mega-firms have added new fund strategies, in some cases carving out specific sector focuses from what used to be global, multi- sector singe funds. If a firm’s next U.S. private equity fund is smaller, perhaps the Asian real estate fund will make up for the shortfall. In addition, the largest firms have the benefit of armies of IR professionals who have maintained ties with investors throughout the Great Recession, making sure their capital partners understand the Herculean efforts that the GPs were undertaking to preserve and create value, and arguing that the same skills will be even more effective in an up-market.

Below, we outline ten fundraisings that are worth watching this year.

1. All Hail Apollo

Apollo Investment Fund VIII targets $17.5 billion

Will the eighth private equity fund from the ambidextrous Apollo Global Management be the biggest fundraise of 2014? Indications so far show surging demand for the fund and no competing efforts to knock Leon Black and team from the top post.

Apollo’s balance sheet and its credit-market expertise gave it an edge in the economic downturn as it navigated its portfolio companies through turbulent times and took advantage of opportunities to enter equity ownership through debt doors. A brilliant example was Apollo’s investment in Netherlands-based LydonellBasell Industries – the firm began acquiring distressed debt in Lyondell in 2008 and converted that to an equity position. It is now selling off its position and has reportedly reaped some $7 billion in value on a $2 billion investment.

“Apollo has produced consistent distributions, which LPs love,” says a placement agent who is watching the effort for Fund VIII carefully. “If they can produce good returns in tough cycles, LPs believe they can do very well in up cycles.”

While the vintage year 2008 isn’t far enough away for truly meaningful performance information, to date Apollo Fund VII is showing a very attractive net IRR of 23.6 percent, according to investor CalPERS. Its 2001 vintage fund is even stronger at 37.7 percent, while a 2006 vintage vehicle is barely cracking 8.1 percent – it’s hard to outperform when you put billions to work leading up to a recession.

Limited partners have been overheard saying they don’t find mega-funds attractive in today’s market, yet Apollo has reportedly lifted its target for Fund VIII from $15 billion to $17.5 billion. Apparently, these LPs are willing to make an exception for Apollo.

2. The European X Factor

Charterhouse Capital Partners looks towards Fund X

Having completed its first LBO in 1982, Charterhouse is one of the few firms to have participated in the entirety of Europe’s private equity history. If LPs support its next fund, the longstanding relationship will continue.

Charterhouse’s credentials are reinforced by its long history of successful investments across Europe, despite a center of gravity in London. Complicating its next fundraise is a mixed view on Europe’s recovery, a challenged leadership transition, and the performance and deployment of Fund IX.

According to a source at a separate European buyout firm, limited partners in Europe, Asia and the Middle East are enthusiastic about participating in what is seen as a sustainable restructuring and recovery across Europe. But US LPs–an important source of capital for the firm– are more hesitant, though warming to the opportunity.

Charterhouse, not unlike a number of other major GP franchises, has gone through some gut-wrenching leadership changes. When managing partner Gordon Bonnyman stepped down in 2010, he originally selected three co-managers to lead the firm, but that was reduced to a single managing partner, Lionel Giacomotto, according to reports. The firm has also gone through a change in ownership structure, several high-level departures, and a lawsuit from a former partner.

The firm’s current fund has not surprisingly had trouble deploying its €4 billion through the recession, and Charterhouse has asked its LPs for an investment-period extension. Whether the firm can put a dent in the remainder of Fund IX will determine if it goes to market with Fund X in 2014.

Charterhouse’s historic returns have been solid to stellar. Fund IX is showing a largely unrealized net IRR of 8.3 percent – not worrying if one factors in the J-curve effect. The first close of that fund was “on 80 percent of the money, as Lehman was falling apart,” says a placement agent who followed the effort.

If Charterhouse can show its team is still aligned and humming, it can lay claim to a rare ability to navigate Europe’s large, variegated and strengthening opportunity.

3. Doughty Hanson 2.0

A veteran firm seeks €3.5bn without one founder

The London-based, pan-European private equity firm Doughty Hanson had a strong 2012, after it began with an unexpected tragedy—the death of co-founder Nigel Doughty. As the firm noted in a 2012 wrap-up report to investors, the firm’s two most recent funds were showing strong performances despite the generally weak conditions across Europe.

Doughty’s passing prompted a rethinking of the firm’s ownership structure. “We decided to move to a partnership model under which the investment team will become partners in the business,” wrote co-founder Richard Hanson. “As a result, ownership of the firm will be spread widely among our 27-strong private equity team and other senior executives. This creates very strong alignment between the Doughty Hanson team and our investors.”

The ownership change will likely be welcome by investors who increasingly want to see broad economic participation in all aspects of the firm and funds. “Before, that organization had always been tightly controlled by Doughty and Hanson,” says a fund due-diligence specialist.

In an increasingly institutional market, the firm is set up to tackle the European opportunity from an array of regional hubs. Its deal teams are supplemented by ESG (environmental, social, governance) risk-screening and its value-enhancement function is making a real performance contribution, according to the firm.

The firm’s last fund was raised in six months. A similar fundraising success this time around will say a lot about investor faith in the future of Europe and the future of a realigned Doughty Hanson team.

4. Fuel Efficient

First Reserve right-sizes for Fund XIII

Few firms are investing out of a fund with the Roman- numeral X in its name. Greenwich, Connecticut- based energy veteran First Reserve is one of them.

Are investors interested in the global energy investment opportunity? Profoundly. Will First Reserve be the dominant manager of their capital for this opportunity? Less so than has historically been the case.

The firm has an unparalleled global network in the energy space and decades of deep experience. It has also been hit by turnover and disappointing recent fund performances. Fund XI, which raised $7.8 billion in 2006, is showing a 4.3 percent net IRR, according to CalPERS. The next fund, which drew $9 billion in 2008–to date the largest energy investment fund ever raised–is showing a four percent net IRR (although the fund is too young for that figure to be very meaningful).

The minutes from a Washington State Investment Board meeting in 2012 summarize the challenges facing (and the continued attraction to) the First Reserve team. In comments made by Fabrizio Natale, an investment officer of the state pension–and long-time First Reserve backer– the firm has a “diversified approach to energy investing, [an] experienced team with extensive energy investing expertise. . . [and a] strong historical performance of earlier funds”.

The board members learned of First Reserve’s “smaller, more appropriate fund size” and how it has “refocused on its core, strengthened the team and processes.” The pension agreed to commit $400 million to the fund, which is now reportedly seeking a reduced target of $5 billion.

5. Goldman, By Half

The silent giant is plotting its next move in a complex regulatory and investment environment

No one is worried about Goldman Sachs—the firm has a habit of winning in ways that leave the competition scratching their collective head. And yet market observers, well aware of the firm’s big footprint as a principal investor, are wondering how the firm can possibly match its previous private equity fundraising goal given market realities and the daunting Dodd-Frank regulations.

Goldman Sachs is, after all, a bank. And Dodd Frank makes it exceptionally difficult to conduct substantial principal investing from under the roof of a bank. Few private equity programs are bigger than Goldman’s. The firm raised just north of $20 billion in 2007 – still one of only two PE vehicles to exceed$20 billion (Black-stone’s 2006 fund is the other).

It is hard to learn much about Goldman’s plans, but the head of the private equity program, Richard Friedman, made some candid comments at a 2012 conference that gave a hint about the scope of the group’s future activities. “Today, a $20-billion fund wouldn’t make sense,” he said, according to a Dow Jones report. “We’ve all had to readjust our strategies to do smaller deals.”

Friedman speculated that the firm’s next private equity fund would be between $7 billion and $10 billion—half the size of the 2007 vehicle. Friedman added, “We’re holding off on raising a new fund until we get clarification on the new rules.”

Goldman’s fund-formation abilities are formidable, but much of the capital from the prior fund came from Goldman partners themselves. According to an announcement in 2007, $9 billion of Fund VI came “from the firm and its employees” and a substantial amount of the remainder came from high net worth clients.

Will the passed hat at 200 West Street raise as much for the next effort? Will there even be a Goldman Sachs Fund VII, or will it be some independent entity, following on a long line of investment bank spinouts? The answers to those two questions will speak volumes about the state of Goldman, the market, and the new regulations governing both.

6. Hopu Springs Eternal

China’s most-connected deal team eyes another $2bn

The standard rules of team and track record don’t seem to apply to China’s most sought-after private equity firm.

After Goldman honchos Fang Fenglei and Richard Ong and KPMG China co-chairman Dominic Ho founded Hopu Investment Management in 2008, the trio did a spate of deals, then went their separate ways. Ong left in 2011 to set up RRJ Capital; Ho retired. The firm reportedly decided to “wind down” its portfolio, but times quickly change. Fang decided to raise a second fund. In the mature private equity markets, having two founders leave in the middle of an investment period tends to sour investors on everyone involved. But in China, access is perceived as an incredibly important investment attribute—and Fang clearly has access in spades. Will investors give him credit for having lined up the $1 billion in capital from Singapore’s Temasek for Fund I and struck deals with Bank of China and China Construction Bank? The answer appears to be “yes.”

Hopu’s second fund is reportedly at $1.1 billion. The firm has done new deals with Temasek as a co-investor. The Hopu team now reportedly includes Bi Mingjian from China International Capital and Cliff Chau from China Investment Corp.

Hopu is among dozens of Chinese GPs on the fundraising trail—but with a proven ability to close and exit large deals with large capital partners, it has a huge advantage.

7. Structured for Success

Levine Leichtman nears $1.5bn

Los Angeles-based Levine Leichtman Capital Partners is a well established “structured equity” firm that also offers other strategies, including an SBIC fund and a California-focused investment program. Its fifth structured equity fund is among the largest in the middle market and will be closely watched as an indication of demand for private equity investment strategies that include fixed-income securities.

The firm’s existing fund, raised in 2008, is showing a strong performance at 26.8 percent net IRR. Reportedly the firm is well on its way to a final close at or above its target – a July SEC filing indicates that Levine Leichtman had raised some $1.27 billion. The new fund will be the firm’s largest yet.

8. Southeast Asian Frontier

TPG-backed Northstar goes for $1bn

Investors have been increasingly interested in opportunities beyond the BRICs, and with a population of 600 million, Southeast Asia appears to be incredibly underpenetrated by private equity. Northstar Group will test investor appetite for that opportunity with a fund that reportedly has a hard cap of $1 billion.

The Singapore-based firm is also evolving in a way that will make many Western-based firms envious— that’s toward greater dominance as a fund investor as opposed to a club-deal leader. The firm’s investment activity to date has seen it oversee a greater volume of co-investment capital than capital from its own fund. Among its investment partners have been TPG, Government of Singapore Investment Corporation (GIC) and China Investment Corporation (CIC).

TPG liked its experiences with Northstar so much that it agreed to a share swap in the firm—TPG owns a 20-percent stake in the firm and Northstar owns a 5 percent stake in TPG. With the global brand and fundraising muscle of TPG behind it, it is likely that $1 billion is a modest beginning for a private equity franchise that has a vast, underpenetrated and growing economic region to play in.

9. TPG’s Time and Money

Building LP Support For Fund VII

During the past five years, no firm has raised more capital for direct private equity investing than TPG. Its record of success can be seen in the quick-succession closes on $15 billion in 2006 and $19.8 billion in 2008, as well as its successful, Carlyle-like forays into multiple strategies and geographies.

When you raise that much capital, a large number of influential institutions pay close attention. The top two metrics they follow: Can all that capital be put to work in an effective manner within a reasonable amount of time? And can the GP team find opportunities that generate attractive returns without undue risk?

For TPG’s most recent two funds, the answers to both questions remain uncertain. According to the most recent CalPERS figures, TPG V is generating a negative 1.4 percent net IRR, and the massive TPG VI, closed at the beginning of the economic downturn, is showing an 8-percent net IRR. Like many mega-firms, TPG has seen some of its pre-recession vintage deals suffer, especially a disastrous investment in Washington Mutual.

What’s more, the firm, led by James Coulter and David Bonderman, has reportedly asked its LPs to give it more time to deploy the most recent fund, extending the investment period into early 2015. An extension would somewhat relieve the pressure to start collecting capital commitments for Fund VII before more much-needed good news starts to flow from either of the recent mega-funds.

10. Japan Also Rises

Unison Looks to Fund IV

Do you have a private equity allocation to the world’s third-largest economy? For many LPs, the answer is no. An expected fundraising effort from the Japan’s largest local PE firm is set to serve as a test of LP-appetite for deploying capital into a post-“Abenomics” environment.

Led by former Goldman banker John Ehara, Unison has a track record of closing large deals in a country that has utterly defeated other powerful global private equity firms.

Protracted economic doldrums in the country, coupled with a stubborn lack of PE deal volume growth, “led many investors to turn away from Japan,” says Kelly Deponte of Probitas Partners. However, according to a recent survey from Probitas, investor interest in Japan has roughly doubled in the past year, due no doubt to a perception that the policies of Prime Minister Shinzo Abe are creating a fresh environment for restructuring and growth. If any groups are to benefit from this perception change, Unison will no doubt be among the first.