Sun Capital expects more modest fund size

Sun Capital Partners expects to follow a trend of private equity firms that raised huge amounts of capital during the credit bubble cutting back on the size of their future funds.

Sun will begin fundraising for a $3 billion fund with a hard cap of $4 billion in 18 months, according to a limited partner who attended Sun’s annual general meeting. Sun declined to comment about fundraising.

That fund size would be a reduction from the firm’s last haul of $6 billion for its fifth fund, which closed in 2007 and is more than 50 percent invested. The target, however, would be similar to Fund V’s original target, which was $4 billion. Sun managed to blow past that target as LPs clamored to get into the fund.

LPs requested in 2009 Sun allow them to shrink their commitments. One public pension official said at the time, “we think they’re a strong manager and GP with smaller fund sizes”.  Another Sun LP told Private Equity International in a recent interview that Fund V’s size was too large, but LPs deserved some blame for pouring capital into the fund. “Everyone knows that fund was too big,” the LP who attended the AGM said.

Sun declined to comment. The firm in 2009 slashed the size of the fund to $5 billion at its LPs’ request, a measure many other GPs took, including TPG Capital, which shrunk the sizes of several funds in 2009. Sun also took $150 million from funds IV and V to re-invest in the portfolio companies of its fourth fund, which closed on $1.5 billion in 2005. The capital was to be used to “complete the investments of the 43 portfolio companies of Fund IV”, a source said at the time.

Fund size jump

Sun’s fifth fund was a huge jump from Fund IV. At the time, a firm spokesman said it didn’t want to launch a new fund “every two years” because it was “too disruptive to deal flow” given the firm’s active investment pace. The firm decided to raise fewer, larger funds.

The firm’s $6 billion pool was to accommodate investments in companies with revenues ranging from $50 million to $4 billion. The fund, as of 31 December, was producing a gross multiple of 1.5x and a 16 percent gross internal rate of return, according to a market source.

The $3 billion to $4 billion range is just right for Sun, which looks to put to work about $1 billion each year and would like to be in and out of the fundraising market every three to four years, according to two people with knowledge of the firm.

In shooting for a more modest fund size, Sun would be following other private equity firms that raised huge amounts of capital in the credit bubble but have cut expectations. Providence Equity Partners, for example, raised a $12 billion fund in 2007, by far its largest-ever fund. The firm is back in the market with its seventh fund trying to collect between $6 billion and $8 billion, but even still some LPs have questioned whether Providence can produce the same kind of outsized returns it generated in earlier, smaller funds.

Kohlberg Kravis Roberts cut back expectations for its 11th North American fund with a target of between $8 billion and $10 billion. That compares to its 2006 fund, which closed on $17.6 billion. 

Firms are reducing fund sizes because limited partners are not making large commitments like they were in the years before the financial downturn, and deal sizes have also gotten smaller. LPs are also being more selective of managers they commit to, and looking for much greater justification to trust their money with firms through performance, alignment of interests and stability of management team.