Large limited partners are taking wait-and-see attitudes to several giant private equity firms that have approached investors about follow-on mega funds.
Firms including Kohlberg Kravis Roberts, TPG and The Blackstone Group are already in informal discussions with a handful of big LPs about the dimensions of new megafunds, say LP advisory sources.
All three firms have only recently closed on record-breaking sums of capital. But the recent pace and size of dealmaking has depleted their stashes of dry powder.
“They’re all at 50 percent, 60 percent, 70 percent invested,” says an advisory source.
Earlier this month, Blackstone announced a final close on a topped-up private equity fund that attracted more than $20 billion in commitments. KKR has disclosed $16.6 billion in commitments for its 2006 Fund. At the end of 2006, TPG closed its most recent fund just north of $15 billion.
The discussions of the sizes and timings of the next megafunds are clouded by the current state of the debt markets.
“No one is doing deals and exits are slowing down,” says an advisor. “The LPs are correctly asking these guys, ‘How are you going to spend $20 billion unless there’s a massive correction in the credit markets?’”
An additional unknown is the future of stock markets globally, which directly impact private equity allocations. Alternative asset allocations are typically designated as fixed percentages of overall portfolios. If public markets contract over the next year, it will mean that allocations to private equity will shrink.
The advisor source says that a slowdown in deals and falling stock markets could mean that some or all of the major private equity firms raise follow-on funds that are smaller than the ones currently active. He added: “Honestly, no one is decided about anything. There are a lot of factors going on.”
Bain Capital is currently in the market with its next fund, which has a $10 billion target and is being raised alongside a $5 billion co-investment vehicle. The relatively large target for the co-investment fund is meant to reflect uncertainty about the pace of dealmaking going forward, a source said. If the deal market slows, the co-investment fund is less likely to be tapped.