U.S. Private Equity Firms On Pace For Record Fundraising Year through Q3: But Does Anyone Think It Will Last?

Last week I wrote a story about Highland Capital Partners’ all-out 20th anniversary bash here in Boston entitled, What Financial Crisis? The same title might be fitting for a piece about the data on private equity fundraising that was released today. Buoyed by a strong third quarter, private equity firms—including venture firms like Highland—are on pace to eclipse last year’s record of $313 billion raised.

Something tells me, especially after yesterday’s global market meltdown, they won’t break that mark. But still, the numbers presented by the Dow Jones Private Equity Analyst newsletter (which were culled from the LP Source database) are pretty interesting. All told, the newsletter reports, U.S. fundraising is up 11 percent so far this year, with $222.6 billion raised by 264 funds in the first three quarters, compared to $200.4 billion raised by 298 funds at the same time last year. At the year’s mid point, the 2008 numbers had lagged 2007 by a slight amount.

Looking closer, though, the picture was more mixed, and more reflective of the current climate than the total figures might seem. Virtually all the gain came in two areas: distressed funds and mezzanine funds. The former (which is part of the Buyout/Corporate Finance category below and consists of funds that specialize in buying troubled companies), saw $38 billion raised by 18 funds, up 28 percent from the $29.5 billion raised by 16 funds at this point in 2007, according to Dow Jones Private Equity Analyst figures. Oaktree Capital Management, based in Los Angeles, set a record for the largest single distressed fund when it raised $10.6 billion earlier this year for its OCM Opportunities Fund VII LP, the newsletter reported.

Mezzanine funds took in $37 billion, compared to a mere $3 billion through the third quarter of 2007. More than half of that—$20 billion (of which roughly a third was in the form of leverage)—was in the GS Mezzanine Partners V LP fund raised by Goldman Sachs Group. Again, this makes sense in today’s climate, because with the turmoil in credit markets, there’s a bigger need for mezzanine funds, which can step in to provide financing without forcing firms to give up huge chunks of equity, according to Dow Jones spokesman Adam Wade. “It kind of fills a gap in the credit markets a little bit,” Wade says.

Venture capital fundraising was up ever so slightly, with $19.7 billion raised by 107 funds, compared to $19.1 billion taken in by 103 funds in the same period last year.

“Limited partners have been saying that they intend to invest in private equity at a steady pace through the current downturn,” said Jennifer Rossa, managing editor of Dow Jones Private Equity Analyst in a statement. “Many of these investors have learned their lesson after the venture bubble burst in 2000. Back then, many LPs stopped investing in private equity, only to miss out on some of the best vintage years the industry has yet produced. This time around, they continue to invest, but they’re being very careful about which strategies they invest in.”

My own take, after talking to people at various gatherings the last few weeks, is that Rossa is being overly optimistic. LPs might have intended to invest at a steady pace throughout the downturn—but that was likely before they realized how bad the downturn could be.

In any case, here is the table:

U.S. Private Equity Fundraising, YTD

1Q-3Q, 2008
1Q-3Q, 2007
No. of
No. of
Buyout/Corporate Finance108$151,512134$155,809
Venture Capital107$19,711103$19,058
Funds of Funds24$10,06244$16,832
Secondary & Other12$4,4438$5,658

Source: Dow Jones LP Source

Bob is Xconomy's founder and chairman. You can email him at bbuderi@xconomy.com. Follow @bbuderi

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