Private equity firms try harder to please investors

By Megan Davies

NEW YORK (Reuters) - Private equity firms are trying harder to please powerful investors as dollars for new commitments become harder to come by.

Buyout firms have sent letters to investors highlighting increased communication, adjusted fees or changed management structures as they struggle to keep investors and attract new capital.

Many limited partners -- the pension and endowment funds that invest in private equity -- have found themselves over- allocated to alternative investments simply because the value of their equity portfolios have plummeted. That's created what is known as a "denominator effect."

Some have been trying to get out of commitments by selling stakes in private equity funds in the so-called "secondary" market. They are also more cautious about where they put available cash, making it tough to raise new money.

That means some private equity firms have had to become more proactive about keeping investors informed on how funds are run and how portfolio companies are faring.

Kohlberg Kravis Roberts & Co KKR.UL, one of the world's biggest private equity firms, told investors in a letter recently that it would be communicating more with them in 2009.

The letter, dated February 6, but obtained by Reuters last week, said KKR's success this year would be defined by a number of things, including "communicating more with each of you so you understand what we are seeing, how we are looking at the world and what is happening in our portfolios."

KKR also plans to expand relationships with its LPs to "help you think through the current environment and provide whatever assistance we can."

Other priorities include an "unrelenting focus on all of our private equity portfolio companies" and "developing direct relationships with capital providers to assist our portfolio companies and to facilitate new transactions."

KKR declined comment on the letter, which was addressed to its LPs and was from founding partners Henry Kravis and George Roberts.

"There are some funds where (firms) have already been communicating pretty consistently," said Steven Kaplan, a professor of finance specializing in private equity at the University of Chicago. "Funds that haven't have an incentive to do so."

He added that fund-raising is now "very, very tough."

Separately, British private equity house Terra Firma Capital Partners Ltd TERA.UL said on Tuesday that founder Guy Hands would relinquish day-to-day control to concentrate on investments and building relations with investors.

There have also been some moves to relieve fees.

Sources told Reuters in February that Boston-based Bain Capital was proposing temporarily waiving management fees for investors in its private equity funds.