Hellman’s hold up

San Francisco-based Hellman & Friedman was an active investor during the month of September, acquiring two companies for a combined $1.9 billion in the span of less than two weeks, but surprisingly, the firm has yet to make a single investment from its latest fund that closed last October.

Hellman’s $1.3 billion purchase of residential building product-maker Associated Materials on 8 September and $640 million deal for online media company Internet Brands on 20 September were both made from the firm’s sixth fund, which closed in April of 2007 on $8.4 billion.

The former deal marked the second investment by Hellman in the building products sector after acquiring heating and air conditioning equipment maker Goodman Global in 2008 for approximately $2.7 billion.

“We actually like the building products space a lot,” Hellman & Friedman managing director Erik Ragatz told PEI. “We’re certainly looking for other opportunities there.”

While the firm looks for deals to wrap up investing for Fund VI, some of Hellman’s LPs are privately questioning what they perceive to be a delay in the investment activity for Fund VII, which collected $8.8 billion last year. One LP described being puzzled that a recent Hellman & Friedman investment opportunity will not be backed by a fund that closed 12 months ago.

“They were in such a hurry to get [the fund] closed,” one LP source said. “It’s a little weird to get it done and then they may not call capital until 2011.” A firm spokesperson declined to say how much dry powder Hellman has left in the sixth fund. An LP source estimated the firm might continue to draw from Fund VI well into 2011.

The LPs stress they are not concerned with the delay in drawdowns from Fund VII, however, 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.

“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,” one LP said. “We’d rather have more deals done than less, but we trust the GPs are making good decisions.”

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 and 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 1.1x 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 2.1x return multiple; the vintage 2000 Fund IV boasts a 34.8 percent IRR with a 2.8x multiple, and Fund II, closed in 1991, has a 22.5 percent IRR and a 2.7x multiple.

Recent exits for Hellman include the July sale of Intergraph, a maker of engineering and geospatial software, for $2.1 billion to Swedish technology company hexagon. Hellman acquired Intergraph alongside TPG Capital and JM Equity in 2006 in a transaction valued at roughly $1.3 billion. A source close to the deal in July said the return for the three firms as a whole would equate to a multiple of more than four times the investment.

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 seventh fund is part of an estimated $420 billion capital overhang in the private equity market that some investors believe is putting upward pressure on pricing as GPs scramble to put their capital to work.