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Behind KPS’s Top-Up Fund

I’m reporting from the Private Equity Analyst Conference and the first panel of the day addressed the issues that buyout firms have been facing for a year now: LP capital constraints, fundraising difficulties, whether or not to do deals, how will private equity make it through this downturn…

But as is usually the case, the most interesting comments were about a specific situation. Michael Psaros, co-founder of turnaround firm KPS Capital Partners explained his firm’s recent success in raising a top-up fund. In a moment that defied the current fundraising market, the firm raised $800 million in new commitments for its third fund, which originally closed in early 2007 with $1.2 billion.

As Dan wrote at the time:

Not only is it relatively amazing that KPS was able to quickly secure $800 million in this environment, but it did so without adjusting the fund’s premium terms. KPS III has a 25% carried interest structure and a 50/50 fee split.

But that’s not all. The firm apparently could have raised much more than that if it had wanted.

According to Psaros, KPS received interest for $1.3 billion worth of commitments in just 14 days but ultimately went with its initial target of $800 million. How did the firm do that? Psaros said there were at least two factors contributing to the firm’s ability to raise funds:

1. “There are enormous amounts of capital offshore.” Countries like Australia, Japan and many in Europe have the capital and are interested in committing to U.S. buyout funds.

2. “There are a lot of public and private pension funds that weren’t in alternative assets that decided that now is a great time to come into the market.” He said a number of large pension funds were previously only 1% or 2% committed to alternative assets and see the market as attractive now. It probably helps that KPS Capital’s turnaround investor strategy is particularly timely, and according to Psaros, will continue to be for awhile.