Private Equity Market Dries Up in Q3

Cash Declined

This year's trend shows cash being invested with private equity firms is declining rapidly. U.S. private equity fund-raising in Q3 declined 70% from the same period last year. So far, the $79.9 billion in total cash raised through 2009 is down 59% from the $195 billion raised at the same time last year.

Funds Converge

The number of PE funds available for investment is waning sharply. The funds either are converging or closing up shop. From last year, the number of active PE funds shrunk from 315 to 265. The amount of Venture Capital funds is shrinking fast, too. Since Q3 2008, available VC funds shrunk from 141 to 83.

Q3 worst for VCs since 2003

Q3 marked the worst 3rd quarter for VC investment since 2003. Investments dropped 58% from $18.9 billion to $8 billion from the same time last year. The venture industry is experiencing similar turmoil to the rest of the private equity market, but the report notes that big name firms and managers with past success are still able to raise cash.

Top Investment Targets: Tech, Life Sciences & CleanTech

Q3's biggest VC closer was Khosla Ventures which secured $1.06 billion for two of its CleanTech-dominated investment funds. Matrix Partners raised $600 million for its ninth high-technology fund. Life sciences investor Domain Associates closed its eighth fund at $500 million, short of its $700 million goal. One new fund, Andreessen Horowitz, closed $300 million of investments in social networking and technology.

Limited Partners Steer Clear of Late-Stage VC firms

Late-stage venture capital fundraising is being hit hardest. Limited partners are cautious because of the market’s lack of successful exits and current aversion to IPOs. Late-stage venture funds raised $564 million through the first three quarters of 2009, down from $3 billion raised in the same period last year.

The biggest draw for capital investment remains to be leveraged buyout (LBO) and corporate finance funds, but even those funds declined. LBOs raised almost $50 billion through 2009’s first three quarters. However, that is a 65% drop from the $140.7 billion raised at the same time last year.

Two Funds Dominate LBO

Two funds alone accounted for 26% of the total raised by LBO funds in 2009. Hellman & Friedman LLC secured $8.8 billion for its "mega" fund - a term that refers to a fund with a goal of over $6 billion. TA Associates also achieved its fund’s $4 billion target in August.

Signs of Increased Confidence

Just like everyone else, limited partners are capital-constrained and taking extra caution with their investment strategies. According to the report, LPs are committing only to firms they’re sure can hit the minimum fundraising target.

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