Providence works to keep mega status in Fund VII

Providence Equity Partners has received a generous re-investment from an existing limited partner as it works to convince the market to support its $6 billion to $8 billion target for its seventh fund.

The Washington State Investment Board recently made a $300 million commitment to Fund VII. The board committed $250 million to the firm’s $12 billion sixth fund, which closed in 2007. The increased re-up comes at a time when many LPs are contributing significantly less to their existing managers. A prime example is Kohlberg Kravis Roberts, which earlier this year received a re-investment from one of its longest-standing LPs, Oregon’s state pension, for $525 million, a decrease from the pension’s pledge to the prior fund of $1.3 billion.

While Washington State has shown its support for the Providence team, which is led by Jonathan Nelson, other limited partners and professionals in the market remain skeptical of the firm’s target amount for Fund VII. Sources tell Private Equity International that Providence has yet to prove it can produce strong returns for investors through a mega-fund.

“They haven’t proven themselves on that scale,” said one LP who declined to commit to Providence. Fund VI was “too large for a media-focused fund”, according to another LP who chose not to commit to the sixth fund.

However, even $6 billion would be a fantastic result for Providence considering the tough fundraising environment and the sector-specific nature of the fund, which doesn't necessarily lend itself to huge fundraising amounts, one GP not connected to Providence said. A firm like The Blackstone Group, for example, can amass big pools of capital as LPs look for exposure into multiple sectors. More narrowly focused vehicles may not attract such large sums, the GP said. 

Providence did not return calls for comment.

Performance tells the tale

Performance numbers over the firm’s existence show Providence built a solid foundation in its early funds, but more recent performance has slowed. The performance information provided is as of 31 December, 2010.

The firm’s debut fund collected $171 million in 1991 and produced solid results, with a gross multiple of 5.1x and a 47 percent gross internal rate of return, according to a source with knowledge of the performance numbers. The second fund, which closed in 1996 on $363 million, also turned out to be a winner, making LPs a gross multiple of 4.5x their money and generating an IRR of 111 percent, the source said.

Fund III, a 1998 vintage that raised $950 million, was producing a gross 1.8x multiple and 21 percent IRR. The firm’s fourth fund closed in the troubled vintage year of 2000 on almost $3 billion. That fund was generating a gross multiple of 2.8x and an IRR of 38 percent.

The firm’s more recent funds have given some LPs and other market sources pause about the firm’s ability to drive solid returns in large investment vehicles.

Again, according to performance numbers as of 31 December, Fund V, which at $4.2 billion in 2004 could be considered mega-fund territory, was generating a gross multiple of 1.3x and a 7 percent IRR. Fund VI, which hauled in an impressive $12 billion in 2007, is producing a gross 1.1x multiple and a 6 percent IRR. That fund has risen since September, when it was generating a 1x total value multiple and a .80 percent IRR, according to performance data from the Oregon Public Employees Retirement Fund.

“It is uncertain if they can invest effectively these larger-sized funds,” said one market source.

Recent activity

Providence was founded by Nelson in 1989 and claims on its web site that it pioneered a “sector-based” approach to private equity, specifically in the communications industry. Prior to launching Providence, Nelson had been a managing director at Narragansett Capital, where he specialised in private equity investments in broadcasting, cable television and publishing sectors.

The firm, which manages about $23 billion, returned $2.2 billion to its LPs in 2010, distributions driven by exits like Kabel Deutschland Holding, the German cable operator. The firm floated the company in an initial public offering last March that valued the company just under €5 billion.

Last month, the firm sold its third tranche of shares in the company, boosting its total gain in the IPO, net of its initial $724 million investment, to $3 billion. The company still owns a 22 percent stake in the company, down from 88 percent prior to the listing. The investment in Kabel came from the firm’s fourth and fifth funds.

The firm also exited Phones4U in March, selling the British mobile phone retailer in a deal that valued the company for between £600 million to £700 million. Providence reaped a 2.5x return on the cash it put into the deal when it bought the business for £700 million in 2006. The return includes a special dividend the firm paid itself on a refinancing.

However, the firm has also weathered a few bankruptcies. Freedom Communications, which the firm backed along with The Blackstone Group for reportedly between $1.5 billion and $2 billion in 2004, filed for bankruptcy in 2009.

Providence also had an equity stake in movie studio MGM, which went bankrupt last year.