If You Raise It, The Deals Will Come?

Not likely. I am in the same boat as most LPs out there: Regarding fund size, let’s not let our eyes get bigger than our stomachs. I’m talking to you, mega-buyouts. What is the point of a giant fund to follow a strategy that is no longer plausible?  In recent months, plenty of LPs have convinced their GPs of the same thing. Blackstone, Madison Dearborn, Thoma Bravo, and plenty others, have all willingly or reluctantly cut their fund size, at the request of LPs.

One exception to that trend is Hellman & Friedman. LBOWire reported today that the firm, one of the most active post-credit crunch buyout firms, will not cut the target on its $10 billion seventh fund. The article makes a lengthy argument that the firm will have no problem meeting this target, citing returns greater than 44% on its fifth. I agree—with returns like that they’ll have no problem finding the money. But what about deploying it?

It’s true that the firm has struck many of the largest deals this year, including Getty Images, Goodman Global and Neuberger Berman. But $10 billion is still a $1.6 billion leap from the firm’s previous fund. Furthermore, today’s environment is far gloomier for PE deals than it was three months ago, when planning for the fund began. Even if Hellman & Friedman is prudent and uses 50% equity in every deal, to spend $10 billion on the size of deals they do will still take more debt than most lenders are willing to part with. The last I heard, lenders were topping out at $450 million in debt per deal. After watching firms like Blackstone and Madison Dearborn cut their targets, I want to say for the record: It’s no longer a sign of defeat to scale back, it’s just rational.