Hellman & Friedman LPs puzzled at fund timing

The firm closed its $8.8bn Fund VII in October 2009, but is still investing from its 2006 Fund VI, a situation that one LP calls ‘a little weird’.

Some Hellman & Friedman limited partners are privately questioning what they perceive to be a delay in the investment activity for the firm’s most recent fund, which closed on $8.8 billion in October 2009.

The LPs, though, stress they are not concerned with the delay in drawdowns from Fund VII; just surprised. The firm is not collecting any fees on the new fund until it actually draws capital, an LP and a separate market source confirmed.

A Hellman & Friedman spokesperson had no comment.

One LP to the newer vehicle described being puzzled that a recent Hellman & Friedman investment opportunity will not be backed by a fund that closed 11 months ago. “They were in such a hurry to get [the fund] closed. It’s a little weird to get it done and then they may not call capital until 2011,” one LP source said, stressing, “I’m not concerned, it’s just kind of funny they were so adamant about getting the fund closed”.

Hellman recently announced a $1.3 billion deal to buy Associated Materials, a manufacturer of exterior residential building products. The firm will make the investment from its sixth fund, which closed on $8.4 billion in 2006.

A firm spokesperson confirmed Fund VII has not yet been activated, but declined to say how much dry powder Hellman has left in the sixth fund. One LP source estimated the firm may continue to draw from Fund VI well into 2011.

“We like money to be getting put to work, but we wouldn’t make commitments to these people if we didn’t trust their judgment,” a second LP said. “We don’t want our GPs to make investments at bad prices. We’d rather have more deals done than less, but we trust the GPs are making good decisions,” the LP said.

Hellman’s success in raising Fund VII was touted as one of the few signs of life in the private equity fundraising market in 2009. The fund got re-ups from about 75 percent of existing investors. Fund VII also included a “substantial” amount of LPs from Europe.

It is easy to see why LPs would scramble to get into Fund VII. The firm has a stellar track record. Despite its perilous vintage year, Fund VI is producing a 4.8 percent internal rate of return and a 1.10x investment multiple, according to performance numbers from the California Public Employees’ Retirement System, as of 31 March, 2010.

Fund V, closed in 2004, has a 29.2 percent IRR, with a 2.10x return multiple; the vintage 2000 Fund IV boasts a 34.8 percent IRR with a 2.80x multiple, and Fund II, closed in 1991, has a 22.5 percent IRR and a 2.70x multiple.

Hellman is just one of the many funds in the private equity universe that have collectively raised about $1.2 trillion since 2005. Hellman’s fund is part of an estimated $420 billion capital overhang in the private equity market that some investors believe put upward pressure on pricing as GPs scramble to put their capital to work.

Another firm, The Blackstone Group, expects to close its sixth fund on $13.5 billion soon, but has about $5 billion left in Fund V.