Madison Dearborn Is Said to Seek $4 Billion for Buyout Fund

Apr 15, 2014 7:48 pm ET

(Adds previous fundraising in last paragraph.)

April 15 (Bloomberg) -- Madison Dearborn Partners LLC plans to seek about $4 billion for its next buyout fund after salvaging some of its boom-era investments, including a bet on Nuveen Investments Inc., that threatened to sink a prior vehicle.

The Chicago-based firm plans to start gathering capital in the second half of the year and expects to raise an amount similar the last investment pool that closed in 2010, according to a person with knowledge of the fundraising, who asked not be identified because the information is private.

Rising stock markets helped Madison Dearborn rescue investments made at the peak of the buyout boom, such as money manager Nuveen and Spanish-language broadcaster Univision Communications Inc., which were subsequently hit by the global financial crisis. The sale of Nuveen, announced this week at a price that will probably allow investors to avoid losses on the 2007 deal, removed one obstacle for Madison Dearborn as it seeks to raise new client money.

Kate Schneiderman, a spokeswoman at Abernathy MacGregor Group, declined to comment on behalf of Madison Dearborn.

Madison Dearborn handed back $2.1 billion in capital to investors last year as asset values jumped and equity markets were open for share offerings. The market value of its last three funds rose 27 percent in 2013 and 10 percent in the fourth quarter, according to a letter the firm sent to investors, a copy of which was obtained by Bloomberg News.

Prior Fund

The firm closed its last fund at $4.1 billion in 2010, a 37 percent decrease from the 2006 pool. The firm originally sought $10 billion and later cut the target to $7.5 billion as it tried to gather capital amid the worst financial crisis since the Great Depression. The fund, which started investing in 2008, was producing a 16 percent net internal rate of return as of Dec. 31, according to the year-end letter.

The boom-era fund hasn’t fared as well, producing a 6.8 percent net internal rate of return as of Dec. 31, said the person familiar. This falls below the double-digit net returns most investors target for private-equity funds and the 8 percent annual returns most pension plans need to achieve to meet future liabilities.

Nuveen Sale

The performance of the 2006 fund was helped by the recent recovery in Nuveen, with the fair market value rising 86 percent last year, according to the investor letter. Madison Dearborn agreed to sell the money manager this week to TIAA-CREF for $6.25 billion, after paying $5.75 billion for the company in November 2007.

The private-equity firm is set to walk away with about $1.1 billion, about the same amount it paid to acquire a majority stake, according to a person familiar with the transaction who asked not to be named because the information is private.

Madison Dearborn led the acquisition of Nuveen in November 2007 near the height of the buyout boom and less than one year before the collapse of Lehman Brothers Holdings Inc. triggered turmoil in the stock and bond markets. The firm and its clients invested $1.27 billion for about a 46 percent stake, according to regulatory filings, including $975 million from its fifth buyout fund for the Nuveen stake, the person said. It later increased its holding with an additional $125 million investment in 2011.

Iben’s Departure

The total purchase price of $5.75 billion valued Nuveen at about 14 times its adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, just as the U.S. mortgage market was showing signs of strain.

Nuveen, the largest U.S. manager of closed-end funds and well known for its offerings in municipal debt, then oversaw about $170 billion. In addition to losing assets during the financial crisis, it was further damaged by the 2012 departure of David Iben, lead manager and chief investment officer at one of Nuveen’s most profitable units, Tradewinds.

While the sale price leaves Madison Dearborn several hundred million dollars short of what it paid, it will break even on the investment, the person said. That’s because it will reap an additional $600 million from Nuveen’s cash reserves and from its share of profits on various products Nuveen started over the years.

Madison Dearborn has raised six private-equity funds with aggregate capital of more than $18 billion since its inception in 1992. It has completed investments in about 125 companies, according to the firm’s website.

--With assistance from Christopher Condon in Boston and David Carey in New York.