TA Associates closes $4bn Fund XI

The 41-year-old private equity firm beat the $3.5bn target for its latest fund. Its reduction of carry to 20% from 25% is not the only reason it resonated with LPs, managing director Brian Conway told PEO.

TA Associates has closed its 11th growth investment fund on its $4 billion hard-cap. Its prior fund closed on $3.5 billion in March 2006.

“Despite a challenging fundraising environment, there was notable investor interest in TA XI,” Kevin Landry, TA’s chairman and managing director, said in a statement. “We not only exceeded the original target of $3.5 billion, but also did so in a relatively short time.”

A spokesman said in an e-mail that the firm issued its placement memorandum in December 2008 and began meeting with investors in January.

TA notably reduced its carried interest rate to 20 percent from 25 percent on Fund XI, a move that was widely seen as a lifeline thrown to limited partners struck with liquidity issues. TPG and HgCapital are among other private equity firms to have implemented similar measures.

Carry and fees have become a bit of a lightning rod – almost irrationally so, almost divorced from net returns and whether a firm charges management fees or not.

Brian Conway

However, Boston-based managing director Brian Conway told PEO that the firm's reduction in carry was only one piece of the firm's fundraising success. He also pointed to TA's 40-year track record, noted that the firm's managing directors have spent an average time of 17 years each at TA, and also highlighted LP interest in mid-market, growth strategies as opposed to mega-buyouts.

The reduction in carry, he said, was a decision the firm made early-on in the process given the difficulties many LPs are now facing.

“We just thought it was the right thing to do given the situation that LPs are in and for [LP investment] committees, carry and fees have become a bit of a lightning rod – almost irrationally so, almost divorced from net returns and whether a firm charges management fees or not,” Conway said. “We don’t charge management fees and we manage less capital per partner than a lot of other firms and have good net returns, but … we could tell that this was an issue for our LPs.”
 
It follows on from similar moves TA made following the dotcom bubble, he noted. “In the 2000 to 2003 period, we did some voluntary 'make-wells' and forewent some scheduled increases in fees because we didn’t think we’d earned them because our investment pace was lower than planned.”

The make-wells, he explained, involved a group of funds post-tech bubble “where the funds were still in positive territory but because they had fallen after the NASDAQ collapsed, the GP share of the value was greater than the carry”. Rather than waiting for the situation to work itself out over time, or restore balance at the end of the fund's life, TA “voluntarily decided to put back after-tax dollars into the fund on a quarterly basis to make sure the GP-LP relationship” was appropriately maintained.

“That was one of several things we’ve done that has engendered a lot of LP good will”, he said, noting that in 2009 there's an increasing strain on the LP-GP relationship in the private equity industry generally.

Fund XI garnered large commitments from many limited partners struggling with overweight alternatives exposure, including the Massachusetts Pension Reserves Investment Management, which approved a $150 million commitment in April. Other LPs include the Florida State Board of Administration, the Los Angeles Fire and Police Pension and the Washington State Investment Board, according to sister data service Private Equity Connect.

The vast majority of investors in TA XI are returning limited partners, primarily from the US,” the spokesman said, noting TA did not use a placement agent for any returning investors regardless of geography. UBS was the placement agent for new international investors, which “are a small percentage” of the fund's LPs.

The fund is the largest of its kind to close this year. Welsh Carson Anderson & Stowe’s 11th fund, which will target investments in healthcare and information business services, closed on $3.7 billion in June.

Meanwhile, mega-buyout firm First Reserve, which focuses solely on the energy sector, closed its 12th fund on $9 billion in April, while Hellman & Friedman in February held a $6 billion first close for its Fund VII, which is targeting $10 billion.