Can Anyone Say Venture?

By Danielle Fugazy, M&A Magazine

January 5, 2009

At the end of 2008, TPG Capital quietly decided to return capital to its limited partners. The firm, which had amassed a war chest of $20 billion for its latest fund, is returning as much as 10% of LP’s investments, trimming its fund size by a maximum of $2 billion. TPG is also cutting its management fee by 1% to 1.5 percent. U.K.-based Permira also returned money to its investors, reaching an agreement with its limiteds that could cut its fund from €11.1 billion to €9.6 billion. A third example might reflect a trend.

The question is who will be next? Global private-equity deal activity totaled a measly $188 billion in 2008, down 71% from $659 billion in 2007, according to Dealogic, and 2009 isn’t expected to be any picnic. Finding deals will be tough, as will guiding portfolio companies through these tumultuous times. Keeping LPs happy is the only way to go if private equity firms want to stay in business for the long haul.

The funds raised last year are massive. For example, The Carlyle Group raised $14 billion, Bain Capital Partners raised $10 billion for U.S investing and €3.5 billion to be invested in Europe. The Blackstone Group raised $21 billion, while Apollo Management and Warburg Pincus each closed on $15 billion.

I bring this up because it reminds of when I used to cover the venture capital market in the late 1990s and early 2000s. At that time, it was the venture capital folks who were talking about cutting or deferring management fees and cutting the funds back altogether. After Crescendo Ventures and Spectrum Equity got the ball rolling, it seemed like every week another venture capital firm was doing something to appease LPs. This went on for a year, (it seemed like an eternity).

Here’s the good news: After the pain of re-sizing the industry, the asset class was able to make a comeback, albeit a quiet one. During 2008, the industry raised $31 billion for investment, reflecting the industry’s endurance. This does mean there’s hope for the buyout market to be the LPs’ darlings once again, especially the groups that work with LPs and make concessions now rather than later when limiteds decide to force the issue. Because LPs may have short memories as it relates to cycles, but they won’t likely forget a fund manager who did them wrong.

Danielle Fugazy

danielle.fugazy@sourcemedia.com