Venture, private equity fund dollars way up

Investors may be more cautious in a slumping economy, but venture capital funds are booming, a new report says.

Some venture capitalists may be taking a more cautious approach with their investments, but their funds are certainly getting more sizable. In the first three months of 2008, venture capital funds raised nearly $5 billion, up 29 percent from the same period a year ago, according to a new report from Dow Jones Private Equity Analyst. In that time, there were 32 funds closed, 10 more than last year.

One reason: more VCs are taking part in late-stage deals that require larger investments in established players, and venture capitalists could need to infuse those companies with cash to make it through an economic slump, according to Jennifer Rossa, managing editor of Dow Jones Private Equity Analyst. Still, she said, the size of venture funds are below what they were in the boom years. Last year, VC funds raised a total of $32.2 billion, down from a decade-high of $83.7 billion amassed in 2000.

"A lot of companies funded in 2001 and 2002 that still can't go public or get a strategic buyer, they may need to get them over the hump until that happens," Rossa said. To be sure, recent reports show that VCs are getting squeezed on the ability to exit deals, whether through an initial public offering or mergers and acquisitions.

Despite the credit shakeout, investors have upped their investments in the private equity markets overall. U.S. private equity funds raised $58.5 billion in 81 funds in the first quarter of 2008, a 32 percent lift from the 68 funds closed in the same period a year ago. That number was hugely boosted by the closing of Goldman Sachs Capital Partners' GS Mezzanine Partners V LP, which raised $20 billion, the largest in history for that kind of fund. (Mezzanine funds involve an equity stake in a company, with a smaller ratio of debt financing.)

Not surprisingly, according to Rossa, leveraged buyout (LBO) fund-raising fell 22 percent to $27.6 billion in the first quarter because of investor fears of the credit market. (LBO funds are largely comprised of debt financing.) "The shakeup in the credit markets has slowed the pace of buyout deals. With the big buyout funds no longer taking up all the attention of private equity investors, other strategies like venture and mezzanine are gaining ground," Rossa said.

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