NOT YOUR FATHER'S MEZZANINE

Howard Gellis likes his current gig as senior managing director in charge of The Blackstone Group's corporate debt investment division. But in recent years he found himself getting nostalgic about the 1990s, when he founded and led Nomura's leveraged capital group.

The nostalgia was purely for investment holding periods. “At Nomura, we were duration agnostic,” says Gellis.

Gellis argues that the traditional structure of mezzanine debt partnerships has not kept pace with changes in the mezzanine market. In particular, the traditional investment duration of three to five years has contracted in a high-velocity environment. The typical mezzanine debt investment duration is now closer to two years, says Gellis.

A shorter duration magnifies the drag of management fees on returns, notes Gellis, who says that this phenomenon made Blackstone reluctant to pursue “some very nice short-term deals”.

Like most other large US private equity firms, Blackstone examined the business development company (BDC) structure in 2004, in part because it facilitates the recycling of capital. Blackstone did not ultimately list a BDC.

Now, Gellis' group has a new fund that includes innovative new attributes that address the higher velocity debt markets as well as the management fee drag. Blackstone Mezzanine Fund II, which rounded up $1.06 billion (€830 million) in May, has the ability to recycle profits back into new deals during the five-year investment period. Limited partners will receive distributions as always, but that capital can be recalled as new opportunities arise.

In addition, the billion-dollar fund is leveraged. It is comprised of roughly $700 million in LP commitments and $300 million in leverage provided by a consortium of banks. LPs pay a management fee on the equity portion only. In the mezzanine strategy, says Gellis, “If returns aren't enhanced, net returns have a tough time hitting minimum thresholds.”

Gellis also notes that the recycling and leverage provision means his firm can do more with a smaller fund. The new fund is not “permanent capital”, but it'll do.

KKR SETS $15.5BN CAP FOR NEW FUND
Buyout giant Kohlberg Kravis Roberts has set a cap of $15.5 billion (€12.4 billion) for the ongoing fundraise of its KKR 2006 fund, a source told sister online news service PrivateEquityOnline.com. According to several sources, the firm had planned to hold a first close for the vehicle in June. KKR declined to comment on the fundraising. In seeking these capital commitments, KKR is touting to potential LPs a cumulative net IRR of 20.9 percent across the firm's first 10 funds. The New York firm was founded in 1976.

WARBURG TARGETS $1BN FOR DEBUT REAL ESTATE FUND
Warburg Pincus intends to start its first fund dedicated solely to real estate. The firm is raising $1 billion (€800 million) for its debut fund, which will look to place half its capital in Asia, particularly China and India, one quarter in the US and the rest in Europe. Although this will be Warburg's inaugural real estate fund – it previously invested out of the firm's general private equity fund – the firm has invested more than $1 billion in real estate operating platforms.

CATTERTON CLOSES FUND VI AT $1BN
Greenwich, Connecticut-based Catterton Partners has closed on its sixth fund, Catterton Partners VI, at $1 billion (€782 million). The fund was raised in just ten weeks and finished “significantly oversubscribed” relative to its hard cap, the firm said. Co-founder and managing partner J. Michael Chu said that the new fund has attracted both returning and new investors, including Dutch pension fund manager AlpInvest Partners. Catterton, which was founded in 1990 and invests in consumer-focused middle-market companies, now has $2 billion under active management.

MORGAN STANLEY CLOSES $1BN FUND OF FUNDS
Morgan Stanley Alternative Investment Partners has raised $1 billion (€782 million) for its third private equity fund of funds. The fund, Morgan Stanley Private Markets Fund III, will invest in North American and Western European buyout funds, venture capital funds globally and special situations funds. The vehicle has an allocation to co-investments and direct secondaries. Morgan Stanley's previous fund raised $500 million in 2005. Cory Pulfrey heads up the Morgan Stanley AIP group, which oversees more than $4.4 billion in private equity commitments in portfolios of private equity funds and separately managed accounts.

JH PARTNERS CLOSES ON $350M FUND
San Francisco-based buyout firm JH Partners has closed on its second institutional fund, having raised $350 million (€274 million). The five largest endowments in the US – Harvard University, MIT, Princeton University, Stanford University and Yale University – have all invested in the second fund. The five schools also participated in the firm's first fund but committed larger amounts to the new vehicle. According to Jeff Hansen, a principal with JH Partners, the firm's first fund is nearly fully invested, and no investments have yet been made from the new fund. JH Partners specialises in lower middle market companies with revenues of $10 million to $200 million.

LIGHTSPEED SPIN-OUT RAISES $280M FUND
Menlo Park, California-based Opus Capital has closed its first independent fund at $280 million (€218 million), exceeding the fund's $250 million target. The new fund will invest in early-stage technology in the internet, software, networking and semiconductors sectors in the US and Israel. Opus was formed in 2005 when Lightspeed Venture Partners cofounder and communications/technology investor Gill Cogan left Lightspeed, along with Carl Showalter, Isaac Applbaum and Ken Elefant to found Opus. Lightspeed was previously known as Weiss, Peck & Greer Venture Partners, but was renamed in 2000 upon the sale of its parent entity to Rabobank.

BLACKSTONE HITS $5.25BN FOR REAL ESTATE
The Blackstone Group confirmed last month that it has reached a final close of $5.25 billion (€4.15 billion) for Blackstone Real Estate Partners V. The fund is the largest real estate opportunity fund ever raised and is more than double the size of Blackstone's previous real estate fund raised in 2003. The firm now has over $7 billion of available capital, the world's largest pool of capital for real estate investing. Blackstone's real estate group now has more than 40 investment and asset management professionals and is co-headed by Jonathan Gray in New York and Chad Pike in London – both senior managing directors.

INTERSOUTH RAISES $275M FOR FUND VII
Intersouth Partners, a venture firm based in Durham, North Carolina, has held its first and final close on its seventh fund at $275 million (€216 million), exceeding its fundraising goal. The fund will invest in seed stage and early stage life sciences and IT companies in the US Southeast, focusing on companies in the “innovation corridor” between Washington DC, through North Carolina's research triangle and Atlanta, Georgia, and on to Florida. The firm typically invests between $500,000 and $8 million in a first round, and up to a total of $20 million in each of its portfolio companies. Founded in 1985, Intersouth manages more than $775 million. Its previous fund, Intersouth VI, closed at $205 million in February 2003.