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US private equity fundraising drops despite rise in fund closings

During the first quarter of 2010, US private equity fundraising dipped to USD17.6bn raised by 97 funds, an eight per cent drop from the USD19.1bn raised by 75 funds during the same period last year, according to Dow Jones LP Source.

When the most recent quarter’s totals are compared to the USD65.9bn raised by 108 funds during same period in 2008 the numbers show how hard the industry has been hit by the economic downturn and credit crunch.

"The fundraising total is negligible, but the story behind the numbers is telling," says Jennifer Rossa, managing editor of Dow Jones Private Equity Analyst. "Many commitments made during the first quarter were to funds early in their fundraising process unlike the same period last year when many closes were holdovers from 2008. We are seeing that limited partners are willing to put what they have to work, though they may not have much to invest."

Leveraged buyout and corporate finance funds claimed the majority of capital put into private equity funds. These funds raised USD9.7bn for 39 funds, a slight increase from the USD9.6bn raised for 27 funds during the same period last year. The buyout category hit this number without the benefit of a closing from a mega fund, a fund of more than USD6bn.

Distressed funds, a sub-sector of buyouts, raised USD3.5bn across seven funds, up dramatically from the USD1.1bn raised by four funds during the same period last year.

Mezzanine funds collected USD1.5bn across seven funds, almost double the USD821m raised by five funds in the first quarter of 2009.

"Specialist strategies, such as distressed and mezzanine, had a healthy start to the year," says Rossa. "The move toward more targeted strategies allows limited partners to dive into sectors they think have greatest potential for returns and diversify what are often buyout-heavy portfolios."

Secondary funds are one specialist strategy that may have hit its peak. In the most recent quarter, secondary funds raised USD1.2bn. These funds raised a hefty amount capital in 2009 — USD3.8bn during the first quarter and USD17bn throughout the year — and are now looking to deploy it.

Venture funds raised USD4.1bn for 34 funds during the first quarter of 2010, a 41 per cent increase from the USD2.9bn raised for 25 funds during the same period last year. The venture industry has been faring better than most over the last year. While venture is coming off a six-year fundraising low in 2009, venture funds were down 53 per cent last year, significantly less than the 68 per cent drop experienced by the private equity industry overall.

The two biggest closes in first quarter of 2010 came from Oaktree Capital Management, which held a USD1.8bn final close for its USD3.3bn OCM Principal Opportunities Fund V and a USD952m first and final close for its OCM Mezzanine Fund III.

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