The Top Ten Private Equity Firms Worldwide

By Elizabeth Harris

Rebounding from a horrific 2008, these 10 firms dominate the world of private equity.

Investors found little shelter in private equity funds during the aftermath of the financial crisis. Many funds suffered major write-downs in their portfolio holdings, while the largest struggled to secure financing for buyouts. But performance improved in 2009, according to returns released in June by London-based Preqin, an alternative-assets research and consulting firm. Net asset values rose an average 13.5 percent for the year, nearly recovering from a 15.8 percent drop in 2008. Here are the 10 largest private equity firms ranked by aggregate capital raised over a 10-year period ending June 2010, according to Preqin.

01 GOLDMAN SACHS PRIVATE EQUITY

$121.9 BILLION

Goldman may be best known for banking, but its private equity group employs a range of strategies including buyout, fund of funds, distressed debt and real estate funds. These funds focus on large, high-quality companies with strong management. One recently announced deal was the sale of Michael Foods, based in Minnetonka, Minn., from affiliates of Thomas H. Lee Partners to affiliates of GS Capital Partners. The deal valued Michael Foods, the largest producer of egg products in North America, at $1.7 billion. goldmansachs.com, 212.902.8848

$74.9 BILLION

Blackstone’s private equity funds roam Asia, Australia, Europe and North America with a focus on buyout, distressed debt, real estate and infrastructure deals. This publicly traded company reported a $360 million profit during the first quarter of the year, versus an $82 million loss for the same period in 2009. “We are witnessing a positive trend in most asset classes as the economic recovery takes firmer root and the outlook for growth improves,” chairman and CEO Stephen A. Schwarzman said in April. “We are seeing concrete signs of economic improvement in our portfolio, and as a result, the carrying value of investments in Blackstone funds rose meaningfully in the first quarter.” blackstone.com, 212.583.5000

03 CARLYLE GROUP

$62.6 BILLION

David M. Rubenstein, co-founder and managing director of the Carlyle Group, credited the firm’s financial strength, diversity, sector expertise and geographic diversity for helping its260 portfolio companies weather the recession and “tectonic” changes in private equity in 2008 and 2009. “Deals were fewer and smaller, equity was up and debt down, fundraising was difficult, distributions were minimal and full exits were scant,” Rubenstein said in a statement in May. “But in the latter half of 2009, fear gave way to cautious optimism. ”Carlyle Group funds focus on buyout, venture, distressed debt and special situations in regions including Asia, the Middle East and South America. carlyle.com, 212.813.4900

04 TPG

$53 BILLION

Formerly known as Texas Pacific Group, TPG follows an investment philosophy built around creating value by investing in change created by industry trends, economic cycles or specific company situations .Funds focus on buyout, distressed debt, bridge and venture strategies. One recent deal includes TPG’s purchase of IMS Health, together with the CPP Investment Board, during the fourth quarter of2009. TPG’s other healthcare investments have included Axcan Pharma, Biomet and Fenwal.tpg.com, 817.871.4000

 05 KOHLBERG KRAVIS ROBERTS

$46.7 BILLION

Kohlberg Kravis Roberts’ emphasis on buyouts helped the publicly traded private equity firm capture a $674.8 million profit during the first quarter of this year. In reporting first quarter earnings KKR noted that the value of one of its portfolio companies, the hospital operator HCA, had nearly doubled from its cost, off setting others such as First Data Corp. that fell by more than a third during the same period. Henry Kravis and George Roberts founded KKR in 1976. kkr.com, 212.750.8300

06 OAKTREE CAPITAL MANAGEMENT

$45.2 BILLION 

Howard Marks, chairman of Oaktree Capital Management, sounded a cautionary note in his May chairman’s memo: The improving economy was making investing more difficult. “The pendulum has moved away from the depression, panic, skepticism and excessive risk aversion we saw in the fourth quarter of 2008, and with the disappearance of those characteristics have gone the great bargain opportunities,” he wrote. Oaktree’s private equity funds include distressed debt, mezzanine, buyout and real estate. oaktreecapital.com, 213.830.6300

07 BAIN CAPITAL

$38.2 BILLION

Bain Capital’s private equity funds focus on buyout, mezzanine and venture strategies. Since its founding in 1984, Bain Capital and its affiliates have invested in more than 300 companies including SunGard, Staples, Double Click and Linked In. Most recently it was reported to be a contender, along with Blackstone, KKR and TPG, to take over RadioShack. baincapital.com, 617.516.2000

 08 CVC CAPITAL PARTNERS

$37.7 BILLION

Many private equity funds struggled to attract investors in 2009, the worst fundraising year since2004; 482 funds worldwide raised $246 billion, a 61 percent decline from the $636 billion gathered in2008. But the buyout-focused private equity shop CVC Capital Partners nevertheless managed to raise the largest amount in 2009 when it closed its fifth buyout fund at about $15 billion. In May CVC used some of that money to help launch Irish jet-leasing company Avalon. cvc.com, 44.20.7420.4200

09 APOLLO MANAGEMENT

$34.2 BILLION

Founded in 1990, Apollo Management focuses on buyout, mezzanine and distressed debt private equity funds. Its better-known portfolio companies include Harrah’s Entertainment, the world’s largest casino operator, and AMC Entertainment. Last spring Apollo moved aggressively to take over CKE Restaurants, operator of Carl’s Jr. and Hardee’s fast food joints. apolloic.com, 212.515.3450

10 APAX PARTNERS

$32 BILLION

Apax Partners oversees venture, balanced and buyout private equity funds and invests primarily in five sectors: technology and telecom, retail and consumer, media, healthcare and financial, and business services. One recently announced deal is the purchase of a majority interest in the technology data protection firm Sophos; the transaction valued the company at $830 million. apax.com, 44.20.7872.6300

After the Fall

By Karen Hube

It’s been nearly two years since the stock market and economy began their downward spiral in the fall of 2008. Since then, thanks to a 50 percent drop in the stock market, government investigations, media disclosures, Bernie Mad off, government bailouts and a wide spread loss of faith in the wisdom of the nation’s biggest banks, investors have fundamentally changed their attitudes towards investing and wealth management. Here are eight lessons learned since the fall of 2008.

DON’T TRUST OLD ASSUMPTIONS ABOUT PORTFOLIO RISK.

For years the financial planning community hyped its ability to crunch numbers and measure the chances that a portfolio will meet client goals. But those analyses were only as good as the assumptions and data on which they were based, and almost none anticipated the domino effect of pervasive leverage. As a result, investors found even meticulously hedged portfolios plummeting.

According to pre-2008 assumptions, “a well diversified portfolio with 60percent in stocks should only drop in value by 25 percent once in about 1,000years. But such a massive decline has actually occurred twice in less than 100 years,” says Chris Cordaro, a financial advisor at Regent Atlantic Capital in Chatham, N.J. Investors need to beware of “outlier events.”

THERE ARE MORE KINDS OF RISK THAN MOST PEOPLE REALIZED.

For years sophisticated and studious investors have primarily estimated investment risk by using standard deviation, a measure of volatility. But the stock market collapse from September 2008 to March 2009 underscored how many different phenomena affect risk calculations, says Dean Junkans, chief investment officer for Wells Fargo Private Bank. “In addition to standard deviation, you have to look at liquidity, interest rate, leverage, event, concentration and transparency risk.”

MARKET VOLATILITY IS THE NEW NORM.

The stock market’s normal ups and downs have escalated into frequent and wild gyrations, and market experts say this volatility isn’t likely to go away any time soon. “It’s because the market is now dominated by speculators,” says John Hirtle, chief investment officer of Hirtle Callaghan & Co. of West Conshohocken, Pa. “Speculators were always the tail and investors were the dogs, but now it’s become the reverse.”

In response, Hirtle says, investors must screen out the daily hubbub of price fluctuations and commit to long-term valuation strategies.

IT’S A BIG WORLD, AND YOU HAVE TO INVEST IN IT.

U.S. investors have traditionally dipped only a big toe into foreign stocks, if that. Why bother? Before 2008, domestic stocks were growing at an average pace of 10percent a year, and you couldn’t easily do better anywhere else.

As the U.S. economy has sagged and emerging market shave risen, that thinking has changed dramatically and probably permanently. Investment advisors who once recommended a 5 percent to 10 percent stake in foreign stocks are recommending up to 50 percent in foreign shares. “People should be globalizing every asset class in their portfolios, not just the equity part,” Dean Junkans says.

IN THE PAST TWO YEARS, VIRTUALLY EVERYTHING INVESTORS THOUGHT THEY KNEW ABOUT FINANCE HAS COME INTO QUESTION. SO WHAT ARE THE NEW RULES?

WASHINGTON’S DEBTIS OUR DEBT.

The federal government has a problem: an annual deficit likely to exceed the Gross Domestic Product by 2012. To help pay off its debt, as early as next year it will launch a new era of higher taxes. For couples with income of more than $250,000 and singles with more than $200,000, income tax rates are likely to jump from 31 percent and35 percent, respectively, to 36 percent and 39.6 percent. Capital gains taxes are expected to rise from 15 percent and 20 percent, and dividends may be taxed at income tax rates rather than the current 15 percent.

And those increases—yet to become law but almost certain to do so—will be followed by more in 2013 under the health care bill signed by President Obama in March. Namely: a .9 percent increase in Medicare payroll tax, and a new 3.8 percent Medicare tax on investment income. Bottom line: Adopting tax-savings strategies prior to each phase of increases is critical.

MEET THE NEWBOSS. WILL HE HELP OR HURT THE OLD ONE?

New financial industry regulation emerging from Congress will usher in a fundamentally changed relationship between the government and Wall Street—one in which the primacy of Washington is reasserted for the first time since, perhaps, the New Deal. What does that role reversal mean for investors? Optimists say less irresponsible behavior by banks; pessimists suspect that banks, curtailed from investing as they wish, will restore lost profits by raising costs for consumers.

ALWAYS BE LIQUID.

Before the crisis, HNW investors’ alternative investment needs were fulfilled primarily by hedge funds, which took in more than $500 billion of new assets in the five years ending in 2008. But after watching asset values plummet while being held captive by lock-up periods and redemption gates, many investors grew disenchanted with hedge funds and are demanding more liquidity in their portfolios.

“Many clients are giving up hedge funds for mutual fund managers who employ hedge fund strategies,” says Joseph W. Spada, an advisor at Summit Financial Advisors in Parsippany, N.J. And investors seem comfortable taking cash out of the markets altogether for extended periods of time, once considered a guaranteed way to lose money.

THE ONLY CERTAINTY IS UNCERTAINTY.

Investing always comes with unknowns, but the level of uncertainty among investors has spread beyond simply the question of which way stocks are headed. “There are issues involving trust and confidence in advisors, trust in the financial system’s stability, trust in the government and corporations,” says Jonathan Satovsky, president of Satovsky Asset Management in New York.

To prevent uncertainty from turning into panic, investors need to establish a sense of control, says Frank Murtha, a behavioral investment expert who cofounded asset management firm Market Psych. “This means having a plan for if—or when—the market or economy falls again.