Warburg Pincus cuts back all LPs on its way to $12 bln

Rather than a traditional fundraise, you might say Warburg Pincus spent a few months arranging limited partner allocations to its latest flagship fund like a jigsaw puzzle.

The requested commitment size of every LP in the fund, which recently closed with $12 billion in external commitments, was “cut back,” according to a person with knowledge of the fundraising. That is because Warburg Pincus saw demand well over its $12 billion hard cap but stuck to the cap. It is a good problem for a general partner to have.

It is not such a good problem for LPs, especially because in this fundraising environment they are being cut back not just by Warburg Pincus but by most of the in-demand GPs in the market, sources have said in recent interviews.

“There is almost universal frustration with the fundraising environment,” one public system LP said recently. “But I hear very little actual pushback against GPs. Lots of private moaning [happens], then they hold their nose and ask for larger allocations.”

Adding to the frustration of LPs, deep-pocketed international LPs like sovereign wealth funds are playing an ever-growing role in the market, sapping the negotiating power of public pensions and other established investors. Warburg Pincus said it saw demand internationally for its fund not just from sovereign wealth funds but from insurance companies and wealthy investors.

Warburg Pincus launched fundraising for Fund XII in May. The $12 billion raised doesn’t include contributions from the GP, which was originally expected to kick in up to $300 million to the fund, according to an investment report from the Fresno County Employees’ Retirement Association.

However, the so-called GP commitment shot up to around $800 million after Warburg Pincus sold a 5 percent stake of the management company to French businessman Marc Ladreit de Lacharriere in October. The proceeds allowed Warburg Pincus to “be more flexible” with investments in its own funds, the person with knowledge of the fundraising said.

Warburg Pincus remains among a handful of buyout firms not to offer a priority return before taking carried interest. The firm also didn’t offer any special incentives to drive demand for Fund XII, unlike some other mega-GPs. Blackstone Group, for example, offered a six-month management fee holiday for LPs who committed to its flagship Fund VII prior to the first closing. Blackstone closed Fund VII earlier this year at $17.5 billion.

That said, Warburg Pincus charges comparably low fees in percentage terms on Fund XII. Management fees run 1.4 percent of committed capital during the fund’s six-year investment period, falling to 1.25 percent for two years after that and 1 percent for the rest of the fund life, according to the Fresno County investment report. (It isn’t clear if the basis for calculating the fees switches to invested capital after the investment period ends.) LPs will pay up to $6 million of organizational expenses, and also will bear any professional or direct operating expenses on top of what’s covered by the management fee, the report said.

The firm historically has not collected “ancillary” portfolio company fees like transaction or monitoring fees, an LP with knowledge of the fundraising said. “They [have] generally been pretty LP-friendly,” the LP said. “For example, even when other funds were sharing ancillary fees 50/50, Warburg Pincus took no fees.”

Warburg Pincus has started investing the fund, but it’s not clear how much has been deployed. The firm’s prior fund collected $11.2 billion in 2012. It largest fund was its tenth, which raised $15 billion in 2007.

Fund X, which invested into the global financial crisis, netted an 8.8 percent internal rate of return and 1.5x multiple as of March 31, according to the Fresno County investment report. Fund XI netted a 20.7 percent IRR and a 1.3x multiple as of the same date, the Fresno County report said.

Action Item: See the Fund XII presentation for the Fresno County Emplyees Retirement Association: http://bit.ly/1XreeEU

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