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Private Equity Fundraising Lowest Since 2004

Private equity fundraising sank to a five-year low in 2009, having its worst year since 2004, with only $246 billion raised by 482 funds worldwide.

According to a new study by researcher Preqin, that level of activity is down 61% from the $636 billion raised in 2008, and a drop of 62% from the record $646 billion raised in 2007.

The fourth quarter of 2009 was the slowest period for the year, with only $35 billion raised by 75 funds – the lowest quarterly total since Q3 2003.

“Fundraising conditions have been extremely challenging in 2009, with a significant number of investors holding back from making new investments,” says Tim Friedman, head of communications at Preqin. He notes that the latest survey, conducted in December 2009 and including more than 100 leading LPs, found that that only 60% of investors have made new commitments in 2009, with many of these institutions investing in far fewer funds than in previous years.

Here are a few of the study’s highlights:

• Of the $246 billion raised in 2009, buyout funds raised the most capital, with $102 billion raised by 84 funds. 170 venture funds raised $27 billion, while 96 real estate funds raised $41 billion.

• In Q4 2009, 13 buyout funds closed with an aggregate $14 billion, 24 venture funds closed with $4 billion, and 17 real estate funds closed with $7 billion.

• Funds focusing primarily on North America raised the most in commitments over 2009, with 228 funds raising an aggregate $145 billion. 136 funds focusing primarily on Europe raised $74 billion, while 118 Asia and Rest of World funds raised $27 billion. In Q4 2009, North American funds raised $19 billion, European funds $11 billion, and Asia and Rest of World funds $5 billion.

• The largest fund to close during 2009 was CVC European Equity Partners V, which closed early in the year with €10.75bn in commitments. The vehicle invests in mid-market companies in Europe.

• The largest fund to close in Q4 2009 was Clayton Dubilier & Rice VIII, a buyout fund targeting companies in North America and Europe. It closed at the very end of 2009 with total commitments of $5 billion.

• The average length of time taken for a fund to reach a final close has increased dramatically over the last two years, and now stands at more than 18 months for funds closed in 2009, up from one year for funds closed in 2007.

• Over the course of 2009, 60% of private equity investors surveyed made at least one new commitment to a private equity fund, while 40% of investors did not make any new commitments.

• Just over half of investors plan to make their next commitment to a private equity fund in the first half of 2010, and 16% plan to wait until the second half of the year.

“Although the recovery in the public markets and adjustment in private equity fund valuations has alleviated the denominator effect that many investors were suffering from at the start of 2009, we are finding that many backers of private equity funds have fundamentally altered their attitudes towards the asset class,” says Friedman.

“We are seeing investors focusing more on understanding the state of their existing portfolios and spending considerably more time when considering new vehicles. Negotiating terms and conditions has become more of a key concern, and we are seeing a trend away from the bigger mega-buyout funds towards more of a focus on smaller mid-market and regionally focused vehicles.”

“Although investors are in a much clearer position now than at the start of 2009, the chances of a return to the fundraising levels seen in 2007 and 2008 are very slim. As a result of the lack of distributions that they have received from existing investments, investors have less capital available to commit to new funds, and although the majority of investors will be active in 2010, it will be at a lesser rate than in recent years. It will not be until we see the market for exits recover significantly that we will see annual private equity fundraising attaining $500bn-plus levels once again.”

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