Warburg Follows the Herd

Warburg Pincus yesterday announced that it has closed its tenth fund with $15 billion, or nearly twice what it secured for its ninth fund in 2005. It’s also $3 billion more than the firm was targeting when it began fundraising last May.

This certainly fits the recent mega-firm pattern, in which Bain, KKR and others have raised record amounts despite a paucity of new deal opportunities. Fee today, call-down in a few hundred tomorrows (unless they spot a problematic PIPE or cratering leveraged loan portfolio).

I had really wanted Warburg Pincus to help retard this trend, which skates the thin line between optimism and greed. Few other firms exude the same spirit of independent thinking – having been an early adopter of globalization and stubborn defender of transacting both massive LBOs and early-stage venture deals out of the same fund. If there was any firm willing to stand on objectivity, it would have been Warburg.

But, alas, it was not to be. Maybe I should have been stripped of my delusions when Warburg propped up MBIA, in a bid to replicate its long-ago success with Mellon Bank (Question: Did LPs who came in on the final close get some sort of discount?). I guess Warburg is willing to stand apart, but not too far apart.

So Blackstone is the now the only fundraising firm left with enough gravitas to help stem market overcapitalization, but looking to Blackstone for moderation is like looking to the Boston Bruins for a Game 7 goal. Sure a few big firms will claim fundraising sanity, but beware the difference of intentional and unintentional fundraising scale-back (yeah, I’m gazing toward Chicago)…

Warburg Pincus would likely respond that it has a flexibile enough investment strategy to handle macro-economic fluxuations, and that it’s investing for the long-term (Note: It declined to comment for this piece). Fine, but it’s a specious argument.

How can any private equity firm claim that it requires the same amount of money today that it did in May 2007? Even if Warburg plans to do the exact same number of deals, many of them will require less cash due to decreased valuations. In fact, the only reason Warburg was raising more money in the first place was because the private equity targets were getting larger and more expensive. Doesn’t what goes up also go down?

Finally, it’s worth emphasizing that LPs share much blame for this fool’s goldrush. I keep hearing investors complain about 2008 fund sizes and strategy drift, but then learn that Warburg got its highest-ever level of LP re-ups. If you don’t want mega-firms raising so much money, then don’t increase your commitments. It’s just as simple as it sounds…