The private equity fundraising climate remained robust in the third quarter of 2005 with forty-five venture funds raising $5.4 billion and forty-five buyout and mezzanine funds fetching $16.8 billion, according to Thomson Venture Economics and the National Venture Capital Association (NVCA).
While the quarterly totals represented a fall off in activity from a strong second quarter, the average venture fund size continued to remain strong at $119 million. After three quarters this year, both venture and buyout fundraising levels have already surpassed 2004 totals.
“It will be a solid year for private equity fundraising as demand for this asset class continues to be extremely strong,” said Mark Heesen, president of the NVCA. “We continue to see discipline on the venture side, with firms keeping close to their original targets despite ample opportunities to raise much more. We could have easily seen a $50 – 75 billion fundraising year had the venture industry not exercised this prudence and accepted more money than could be invested successfully. The dollars that are being turned away from venture are likely being channeled into buyout funds and hedge funds, helping to drive the surge of capital into those asset classes as well.”
Venture funds in the third quarter collectively raised 16.9% less than those in the second quarter, when fifty-three funds took in $6.5 billion in commitments. However, when compared to the third quarter of 2004, this quarter posted an 11.6% increase. Buyout fundraising followed the same pattern with a 28.5% decrease in activity from the $23.4 billion raised in Q2 2005. Yet again, the quarter’s figures represent a 23.5% increase over the third quarter of 2004.
Year-to-date figures on both sides of the spectrum reinforce the evidence of a swelling fundraising market characterized by a growing average fund size. Thus far in 2005, 130 venture funds raised $17.4 billion while 122 buyout funds raised $54 billion. In the same time frame during 2004, 143 venture funds raised $10.7 billion, and ninety-four buyout funds received $33.5 billion in commitments. These are increases in total value over 2004 by 62.1% and 61.4%, respectively.
Venture fundraising by investment stage focus followed a familiar pattern in the quarter. Twenty-two early stage vehicles raised $2.4 billion, or 44.1% of the quarter’s entire venture commitment. Among these were Accel London II at $450 million, which tied for the second largest venture fund raised in the quarter, and Mayfield XII with $375 million.
Eighteen balanced funds raised $2 billion, led by Morgenthaler VIII at $450 million, Sigma Partners 7 with $400 million, and $375 million for Healthcare Ventures VIII — roughly 60% of the balanced stage total. Four later stage funds totaling $138.6 million and one expansion-focused fund with $80 million rounded out the quarter’s numbers. The largest fund of the quarter comes from the pool of later stage vehicles — Sequoia Capital Growth Fund III, with $520 million.
Follow-on funds continued to be raised to first time funds at an approximate ratio of 3-to-1. Only ten new funds were raised in the quarter, compared to thirty-five follow-on entities.
Buyout funds continued to bring in commitments at the traditional 3-to-1 rate over venture funds. Among these was the largest of the quarter, Apollo Investment Fund VI, which collected $4.9 billion of its $7 billion target. Apollo’s was also the year’s second biggest fund raised. Several other mega funds were capped off this quarter: Oak Hill Capital Partners II took in a final $587 million to close at $2.5 billion; Elevation Partners closed at $1.8 billion; Lehman Brothers Merchant Banking Partners III oversubscribed its $1 billion target to land at $1.2 billion; and Spectrum Equity Investors V held a final $203 million close to come in at $1.2 billion. Looking ahead to the fourth quarter, the mega funds that raised money this quarter still have $6 billion in commitments to go before they reach their collective target.