Buyouts presents: The hottest funds of 2017

Fundraising has long been about the haves and have-nots, and 2017 will be no exception.

Buyouts talked with our extensive limited-partner network about which funds make their blood run hot. Based on that research, we put together a sample of the most in-demand funds coming back to market (or just hitting the market) in 2017.

This is, of course, not an exhaustive list, and we likely missed a hidden gem here or there. But it’s a broad view into funds that are generating the most buzz among investors.

Below you’ll find funds expected to have lightning-quick fundraisings, little room for new investors and the ability to dictate terms. A few on our list also may not have such smooth marketing processes but have LPs talking just the same because of the people involved.

We’ve presented as much information as possible. Keep in mind that the targets on many of the funds below are subject to change, since many of them have not officially hit the market.

A fund for all sizes

Robert Smith’s Vista Equity has been a fundraising machine over the past few years, raising significantly larger vehicles and introducing new products to market.

Next year, the firm will officially unveil its debut microcap software fund targeting $400 million with a $500 million cap. The fund will be led by Principal René Yang and an operator who has worked as a senior executive in Vista portfolio companies.

The fund has yet to enter the market and already is highly sought-after. It has been described by LPs as a replacement for Vista’s Foundation Fund series, which has grown beyond its roots in the lower middle market. GPs see opportunity to seize on smaller-end-of-the-market investments that their larger funds ignore.

Quick return

Genstar is known as a torrid fundraiser when it launches a fund. The firm is returning to market at a fast pace, having closed Fund VII last year on a bit more than $2 billion and having made its first investment from that vehicle in October 2015.

LPs expect Genstar’s eighth fund to be another lightning-quick fundraising. Fund VIII is expected to target $2.5 billion; it’s unclear whether the vehicle has a cap. Investors say the fund could greatly exceed the target, but the level at which the firm will limit the vehicle remains to be seen.

With LPs desperate for strong funds in which to park their money in this low-rate-low-return environment, a firm like Genstar producing hefty returns has no problem raising capital. While Fund VII returns are too early to be meaningful, Fund VI, which closed on $1 billion in 2012, was generating a nearly 39 percent internal rate of return for Public Employees Retirement Association of Colorado.

A legendary haul

Apollo Global Management’s next flagship fund, Apollo Investment Fund IX, will tip the scales at levels comparable to its behemoth $17.5 billion predecessor, which closed in January 2014. When adding in $880 million of firm capital, Apollo Investment Fund tipped the scales at about $18.4 billion.

Apollo has been chalking up a quick series of take-private and other acquisitions including Rackspace, Diamond Resorts, AmQuip Crane Rental and Connstellis. With Apollo Investment Fund VIII now about 65 percent committed, its typical deals cost less than 6x adjusted EBITDA, as it sticks to its discount buying credo.

With solid performance numbers, LP interest is expected to be strong for Apollo. Fund VIII rang up a net IRR of 13 percent as of Sept. 30, while Fund VII turned in an IRR of 26 percent.

Across the pond

While CVC Capital Partners has yet to confirm its latest flagship fundraise, it’s already boosted its expected haul for CVC European Equity Partners VII.

Sources expect the Luxembourg firm to raise about 12.5 billion euros ($13.3 billion). Earlier market talk pegged the fund at about 10 billion euros, close to the level of its predecessor.

CVC seems poised to continue its fundraising success. In 2013, it wrapped up CVC European Equity Partners VI in about six months while turning away LP money. The fund drew 14 billion euros of demand but wrapped up at 10.5 billion euros. That pool is now about 45 percent invested.

While the European economy remains mixed, LPs and GPs often cite the region as offering more value than the pricier U.S. With European firms Cinven and Ardian successfully raising fresh funds in 2016, CVC remains a marquee name to tap into this interest in 2017.

Fishing in deeper waters

Marlin Equity has had a meteoric rise, getting progressively larger with each fundraising. This time around is no different: Marlin is targeting $2 billion for its fifth fund, with no cap. And LPs expect Marlin to bring in demand well above the target. The question then becomes: How disciplined will the firm be on fund size?

Marlin also is bringing its sophomore small-market offering to market, targeting $500 million. Marlin closed its fourth fund on $1.6 billion in 2013, and its debut small-market fund, called Heritage Fund, on $400 million in 2014.

The fourth flagship was a big jump from Fund III, which collected $650 million in 2009. Fund IV was producing a 1.03x total value multiple as of July 31, 2016, according to New Jersey Division of Investment.

LPs say Marlin V will be a one-and-done fundraising, with new LPs scrambling for limited space in the flagship vehicle.

Wide-ranging estimates

Bain Capital Fund XII is expected back in market in 2017, though the question of how much the firm will target remains open. One source said the firm is expected to tip the scales at about $10 billion, if the current fundraising market maintains its strength in 2017. A second source said the firm would likely set its target close to the $7 billion level for Fund XII, in line with Fund XI.

Bain Capital offered a tiered-fee option for Bain Capital Fund XI in 2014. Instead of the traditional 2 percent fee to manage the assets and 20 percent of investment profits, Bain offered investors options including a 1.5/20 fee structure with a 7 percent preferred return rate.

While the effort took more than a year and wrapped up below the hard cap of $7.5 billion, the firm exceeded its initial target of $6 billion with a total of $7.3 billion in commitments.

By March of this year, Fund XI was about 44 percent drawn, according to a market source. Since then, the firm has announced a deal with Bow Street to buy online jeweler Blue Nile for $500 million.

A big one coming back

Clayton Dubilier & Rice is one of the elder statesmen of the private equity industry, founded 1978. The firm is expected back in market with its 10th fund, either late this year or early in 2017. The target on Fund X is unclear but could reach $8 billion or higher, sources told us.

At $8 billion, CD&R X would be 28 percent larger than Fund IX, which closed on $6.25 billion in 2014. For Fund IX, however, the firm turned down as much as $2 billion in demand from LPs, Reuters reported. Fund IX has been a strong performer, producing a nearly 22 percent internal rate of return as of March 31, 2016, for California State Teachers’ Retirement System.

Sarkozy steps into the fray

Emerging from Carlyle Group’s financial services unit, which raised two funds, Olivier Sarkozy, who led the effort at Carlyle, decided to cut his own path through the PE landscape.

Sarkozy has spent the past several months preparing to launch his debut fund, which will invest in financial institutions. Word is he could target up to $1.5 billion and had already attracted a large amount of capital through anchor commitments.

Carlyle raised its debut financial-services fund in 2008, collecting about $1.1 billion. That fund was generating a 12.6 percent net internal rate of return and a 1.5x multiple as of March 31, 2016, California Public Employees’ Retirement System data showed.

Fund II closed in 2014 on about $1 billion and had deployed about $602 million as of June 30, 2016, according to Carlyle’s second-quarter earnings report. Fund II was generating a 1.1x multiple of invested capital as of the same date, Carlyle reported.

Rock solid

Two limited partners said they were interested in seeing One Rock Capital Partners return to market with its second flagship vehicle. The firm is targeting $700 million.

One Rock, which has a strategic partnership with Mitsubishi Corp, closed its debut fund on $431.5 million in 2014, beating its $300 million target by more than 40 percent.

One Rock co-founders Tony Lee and R. Scott Spielvogel are former managing directors at Ripplewood Holdings. Their new firm, which boasts a staff of 22 investment and operating professionals, specializes in taking controlling stakes in mature middle-market companies in North America.

The firm invests across a variety of sectors, including chemicals, specialty manufacturing, business and environmental services, auto retail and healthcare. In November, the firm oversaw portfolio company Island Energy Services’ acquisition of Chevron USA’s refining, distribution and retail assets in Hawaii.

Like clockwork

Limited partners could almost set a clock to Chicago mainstay GTCR’s fundraises, which usually arrive every three years. The firm is expected to return with its 12th flagship fund in late 2017 or early 2018, LPs told Buyouts.

GTCR’s previous fund closed on $3.85 billion in early 2014 and has yet to generate meaningful returns, according to Maine Public Employees’ Retirement System documents. Fund XI had called a little less than half Maine’s $35 million commitment as of June 30.

Fund X, GTCR’s $3.25 billion 2011 vintage fund, was netting a 21.75 percent internal rate of return as of the same date, Maine documents show.

GTCR specializes in partnering with proven management teams and often brings back the same executives to run its platform investments. One deal it announced in first-half 2016, an investment in specialty pharmaceutical company TerSera Therapeutics, is its third with company Chairman and CEO Ed Fiorentino.

In addition to TerSera, GTCR announced four other deals earlier this year. The firm acquired telecom-services business Onvoy, mortgage-technology company Optimal Blue, driver-safety-monitoring service Lytx, and Vector Laboratories, a life-sciences company.

Photo courtesy ©iStock/GlaserStudios

Read the full chart here: buyouts-2017-highly-anticipated-funds-coming-to-market-list

This story was written by Paul Centopani, Steve Gelsi, Sam Sutton and Chris Witkowsky