Providence expects $5bn for Fund VII

Fund VII will raise less than its original $6bn target, according to remarks made at the firm's annual meeting by CEO Jonathan Nelson.

Providence Equity Partners will likely raise around $5 billion for its seventh fund, which is set to close in December, according to three people with knowledge of the firm.

Providence’s chief executive officer, Jonathan Nelson, announced at the firm’s annual meeting last week that Fund VII, which was targeting $6 billion, will likely wrap up fundraising on around $5 billion, according to two limited partners who attended the meeting. However, Nelson’s $5 billion prediction is not set in stone, and that amount could go up, said another person who attended the meeting.

Nelson also talked at the meeting about the firm “refocusing” on its core strategies, including media, communications and education, the person said.

The firm declined to comment.

Jonathan
Nelson

Providence launched its seventh fund last year, and had initially talked to LPs about targeting a range of $6 billion to $8 billion for the vehicle. Fund VII’s official goal on the private placement memorandum was set at $6 billion.

A $5 billion total haul, while impressive, would be a significant reduction from the firm’s sixth fund, which collected $12 billion in 2007.

One of the LPs who was at the meeting expressed some surprise at Nelson’s announcement, and said a more than 50 percent decrease on the total of Fund VII from the prior fund would be a pretty strong statement from the market.

LPs believe the firm performs better with smaller funds, the LP said. The firm is at its best when it is focusing on its core, “specialist”, strategies, and a specialist fund doesn’t need as much capital as a more generalist fund that looks at a broad range of sectors, the LP said.

Providence’s track record seems to prove out the idea of better performance with smaller funds. The firm collected $171 million in 1991 for its debut fund and produced solid results, with a gross multiple of 5.1x and a 47 percent gross internal rate of return. Fund II, which collected $363 million in 1996, also soared, generating a gross multiple of 4.5x and an IRR of 111 percent.

The third fund, a 1998 vintage that raised $950 million, was producing a gross multiple of 1.8x and a 21 percent IRR – not bad for a fund that was investing in the period just before the Internet bubble burst at the end of the 1990s. Fund IV, which closed in 2000 on almost $3 billion, was generating a gross multiple of 2.8x and an IRR of 38 percent.

After that strong run of performance, the firm’s more recent funds have been less impressive. The fifth fund, which at $4.2 billion in 2004 could be included in mega-fund territory, was generating a gross multiple of 1.3x and a 7 percent IRR, and the massive sixth fund, a $12 billion mega-vehicle that closed in 2007, was generating a 1.3x multiple.

Providence has kept active over the past few years, revealing at the meeting that it distributed about $4.1 billion to its LPs from July 2011 to June 2012, while committing about $2.8 billion during that time period, according to the person who attended the annual meeting. Over three years, the firm said it had generated realised proceeds of $8.5 billion while committing $6 billion, according to the person.

Meanwhile, the firm also said it made its first investment from Fund VII, injecting an undisclosed amount of equity into NEW Asurion, an existing Fund VI portfolio company that provides insurance for wireless phones. Providence marks the $578 million investment, which it made in 2007, at a 3x multiple, of which 2.7x is realised, the person said.