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US private equity fundraising drops 70 per cent in third quarter

The typically quiet summer months were slower than usual for US private equity fundraising with 72 funds raising USD25.2bn in the third quarter, a 70 per cent decline from the same period last year, according to Dow Jones Private Equity Analyst.

Through the first nine months of 2009, 265 private equity funds raised USD79.9bn, down 59 per cent from the USD195bn raised by 315 funds at the same time last year.

"Even as a boost in public markets provided some respite to limited partners’ liquidity issues, many continue to give general partners the cold shoulder," says Jennifer Rossa, managing editor of Dow Jones Private Equity Analyst. "Limited partners are still capital-constrained and more cautious about committing only to firms they’re sure can hit a minimum fundraising target, but there are some signs they’re beginning to warm up. Several investors came out of hibernation in the third quarter, making their first investments of the year."

According to Dow Jones Private Equity Analyst, leveraged buyout 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 USD49.4bn through three quarters, a 65 per cent drop from the USD140.7bn 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.

However, two funds accounted for 26 per cent of the total raised by buyout funds in 2009. Hellman & Friedman Capital Partners VII closed USD8.8bin, making Hellman & Friedman the first firm to close a mega fund – those with an investment goal over USD6bn – in 2009. TA Associates XI hit its USD4bn hard cap in August.

Distressed funds, a subcategory of buyouts, raised USD9.8bn across 21 funds in the first nine months of 2009. This is a 68 per cent decline from the same time last year when a few large individual funds contributed to a total USD30.6bn raised by just 17 offerings.

After reaching a record fundraising year by the end of the first half, the momentum in the secondary market has subsided. Secondary funds raised USD165.3m in the third quarter, bringing the total for 2009 to USD14.3bn across 21 funds, more than five times the USD2.6bn closed in 2008.

"Limited partners’ investments in secondary funds have come to a screeching halt because deals are not getting done," says 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."

Venture capital fund-raising is at its lowest level since 2003. The industry raised USD8.0bn across 83 funds so far this year, a 58 per cent drop from the USD18.9bn 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 USD3.5bn 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 USD600m and Khosla Ventures which wrapped up a pair of funds totaling USD1.06bn, mostly for cleantech investments. The debut fund by Andreessen Horowitz proved that technology stars can still command LPs’ attention by closing USD300m.

The first three quarters of 2009 saw USD1.4bn invested in 11 mezzanine funds, down 94 per cent from the same time last year and USD6.9bn put in 29 fund of funds, down 14 per cent from this time last year.

Outside of Hellman & Friedman and TA Associates’ funds, the largest fund closing in the third quarter was held by Oaktree Capital Management which raised USD1.6bn in its OCM Opportunities Fund VIII.

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