Deals & More

We’ve been writing for a while about the crunch in the venture capital industry.

Well, the latest data shows that U.S. private equity firms (including venture capital firms, but also other firms that invest private money, such as buyout firms) raised only $25.2 billion in the third quarter — or 70 percent less than the same period last year.

This means much less money will flow to technology start-ups over the next few years.

Through the first nine months of the year, 265 private equity funds were able to raise $79.9 billion. That’s 59 percent less than the $195 billion raised by 315 funds during the same period last year, according to the report prepared by Dow Jones.

Despite the recovery in the stock market, the large investors that devote money to private equity, known as limited partners, are still cautious about committing money. Some of them are still constrained by the capital calls crisis. The large university endowments, long a source of funding for venture firms, have reported major losses. And when venture firms go on the road to raise money, it generally takes months to wrap up the fundraising, which makes the problem worse, because it means limited partners have to earmark their precious capital for the duration of that process — and thus they risk facing the possibility that the firm is unable to raise money from other investors. Some limited partners would rather not take that risk of having their capital parked uselessly for so long.

Here are some of the findings from the Dow Jones report:

Buyout funds are still biggest draw, but also among the hardest hit:

…leveraged buyout (LBO) and corporate finance funds continue to attract the largest proportion of capital investment, but still suffered a significant decline from a year ago. Buyout funds raised $49.4 billion through three quarters, a 65% drop from the $140.7 billion raised at this time last year. The decline is largely driven by the absence of larger funds from the market, as the 121 funds closed this year is on pace with 2008 which saw 126 funds close by the same time last year.

Still, two funds accounted for 26% of the total raised by buyout funds in 2009. Hellman & Friedman Capital Partners VII LP closed $8.8 billion, making Hellman & Friedman LLC the first firm to close a ‘mega’ fund in 2009. Popular during the private equity boom from 2006 to 2008, mega funds are those with an investment goal over $6 billion. TA Associates XI LP hit its $4 billion hard cap in August.

Distressed funds, a subcategory of buyouts, raised $9.8 billion across 21 funds in the first nine months of 2009. This is a 68% decline from the same time last year when a few large individual funds contributed to a total $30.6 billion raised by just 17 offerings.

Secondary market funds slow

After reaching a record fundraising year by the end of the first half, the momentum in the secondary market has subsided. Secondary funds raised $165.3 million in the third quarter, bringing the total for 2009 to $14.3 billion across 21 funds, more than five times the $2.6 billion closed in 2008. “Limited partners’ investments in secondary funds have come to a screeching halt because deals are not getting done,” said Ms. Rossa. “Secondary fund managers have an unprecedented amount of capital to invest and limited partners are interested in selling their assets, but the two sides have been unable to agree on a price.”

“Brand-name” venture firms are doing relatively well, even as the industry hits six-year low:

Venture capital fund-raising is at its lowest level since 2003. The industry raised $8.0 billion across 83 funds so far this year, a 58% drop from the $18.9 billion raised by 141 funds at the same time last year. This marks the worst third quarter total for venture capital investment since 2003 when 53 funds raised $3.5 billion in the first nine months of the year.
Several brand-name firms did land new pools in the third quarter, including Matrix Partners which closed its ninth fund at $600 million and Khosla Ventures which wrapped up a pair of funds totaling $1.06 billion, mostly for cleantech investments. The debut fund by Andreessen Horowitz proved that technology stars can still command LPs’ attention by closing $300 million.
The first three quarters of 2009 saw $1.4 billion invested in 11 mezzanine funds, down 94% from the same time last year and $6.9 billion put in 29 fund of funds, down 14% from this time last year.

Elsewhere…

Outside of Hellman & Friedman’s and TA Associates’ funds, the largest fund closing in the third quarter was held by Oaktree Capital Management which raised $1.6 billion in its OCM Opportunities Fund VIII LP fund.

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