Whilst VCs struggle, buyout funds rebound

As many VC firms search for investments whilst nursing their portfolios back to health, buyout firms are finding the current environment much more to their liking.

Evidence suggests that the private equity industry, and in the US in particular, is experiencing a divergence where two distinct investment patterns are emerging. Although numerous VC and buyout firms closed $1bn plus funds during the past three years, it would appear that only buyout firms are finally seeing a number of investment opportunities come their way. The same cannot be said however for the large VC funds.

A case in point is US VC firm Accel Partners, which recently announced that it had shelved plans to split its $1.4bn fund into two separate funds following objections from a number of its investors. The firm announced yesterday that it would instead reduce the size of Fund VIII by 32 per cent to $950m.

The firm had been keen to avoid a return of funds to investors, and had planned instead to dispense with its management fee on the second half of the fund until its activation in late 2003 or 2004. However, some investors rejected the firm's plan to hold them to their commitments rather than simply releasing them from further claims on their money.

The Accel situation is typical of a problem facing many funds which have raised vast amounts of cash and are struggling to put the money to good use. Other US VC firms, including Kleiner Perkins Caufield & Byers and Mohr Davidow Ventures, are currently reported to be facing up to the dilemma of whether to bite the bullet and return funds to investors.

The situation for buyout funds seems to be far more positive, with major buyout opportunities now appearing on a regular basis at a time when many such funds have considerable fire power. US research company Venture Economics reports that there is up to $120bn of unused money resting in buyout funds, compared with only $23bn invested in 2001. But practitioners point out that the growing number of buyout opportunities available now means that there is a clear timescale emerging whereby this money can be put to use.

Earlier this week, for example, Qwest Communications announced that it was looking to sell its telephone directories business (QwestDex) for $8bn. A large number of private equity firms have expressed interest in buying the business, with one consortium comprising Madison Dearborn Partners, The Carlyle Group and Welsh, Carson, Anderson & Stowe among others, while another is made up of Kohlberg Kravis Roberts & Co, Thomas H. Lee and The Blackstone Group.

Other large buyouts taking shape at present include Jefferson Smurfit, the Irish paper and packaging company, which is on the block at around $3bn with Madison Dearborn the front running bidder. Burger King, the fast food chain owned by Diageo, also looks set to go to a buyout consortium for around $2-3bn. In Europe, French industrial giant Legrand looks to be next on the block, with sources close to the deal suggesting an announcement could be made later this month on the sale of the E4-5bn firm. Four consortia have submitted bids for the firm, with privare equity interest from Carlyle, Candover, CVC Capital Partners and Paribas Affaires Industrielles among other notables.