Madison Dearborn Misses Goal

DFN: I work at NextG Networks.

Madison Dearborn Misses Goal, But LPs Say $4.1B Nothing To Sneeze At
By Keenan Skelly

After 28 months of raising capital for its latest fund, Chicago-based firm Madison Dearborn Partners LLC has finally closed Madison Dearborn Capital Partners VI LP.

The fund closed on $4.1 billion, far below its initial target of $10 billion, set back in relatively sunny December 2007. That target was revised lower to $7.5 billion in the summer of 2008.

Past limited partners who chose not to reinvest include California Public Employees’ Retirement System, California State Teachers’ Retirement System, Makena Capital Management and Ireland’s National Pensions Reserve Fund.

Madison Dearborn faced multiple problems on the fund-raising trail. In addition to the financial crisis, which has hurt firms’ ability to raise capital across the board, Madison Dearborn saw pointed questions from LPs about the performance of its predecessor fund. That $6.5 billion fund, which closed in 2006, put capital to work very quickly in large deals such as Univision Communications Inc. and CDW Corp. at the height of the buyout bubble, and had few realizations to show when the firm returned to market.

Madison Dearborn defends the Fund V acquisitions, saying it invested in dominant businesses with strong free cash flow when the credit markets were robust. The fund is showing some signs of recovery, valued today at 85 cents on the dollar, compared to 70 cents on the dollar as of June 30, 2009.

Across the entire portfolio, companies’ Ebitda has grown 21% since acquisition. Additionally, the companies have reduced their leverage by 20% since being acquired, said people close to the firm. A spokesman for Madison Dearborn declined to comment.

Despite the tough fund-raising campaign, investors say $4.1 billion is nothing to sneeze at in this environment. “The fact is they’ve raised a significant amount of capital,” said one longtime LP. “One may say that they had some missteps in the most recent fund, but they now seem to be in a position to do well enough. They have a history of doing well even after they’ve made some missteps.”

Investors who did choose to continue with the firm include Yale University, Harvard University, Northwestern University, Lehigh University, Pennsylvania State Employees’ Retirement System, Abbott Capital Management, Portfolio Advisors, Montana Board of Investments and Pathway Capital Management.

Some of them say one reason they reinvested is because the firm seems to have refocused on what it does best: making growth-oriented investments on a proprietary basis. In light of this, some LPs are pleased with the smaller size of the fund.

“It doesn’t disappoint me at all that they didn’t raise nearly what they set out to. I would have been happy with just [the] $3 billion [first closing],” said another longtime investor. He said the firm’s expertise has always been in the middle market. “Their returns there are phenomenal.”

All of Madison Dearborn’s four most recent deals – for BWAY Holding Co., TransUnion LLC, Weather Investments SpA and NextG Networks Inc. – were done outside of an auction process. People close to the firm say that Madison Dearborn chose to take less debt than was offered by banks for two of the deals.

Madison Dearborn has committed $260 million of its own cash upfront – as compared to the practice of funding the GP commitment via deferred management fees that is practiced by a number of buyout firms. The firm is the largest investor in Fund VI.

Since inception in 1992, Madison Dearborn’s gross performance on fully realized investments is 2.5-times invested capital, said people close to the firm.



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