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Catalyst to raise third fund in 2009

Coming off its best year in terms of exits, mid-market private equity firm Catalyst Investors plans to raise between $300 million and $500 million in 2009 for its next fund, PE Week has learned.

Catalyst spun out of Toronto Dominion Bank in 2000 with a $110 million fund. It raised $125 million for its second fund, which closed in 2006.

Managing Partner Brian Rich says that fund II is about 50% invested.

“We’ll probably be out in the market again next year. It will be a little bigger because we want to own a little more of our companies,” he says.

News of Catalyst’s fund-raising plans comes as the New York-based firm distributed nearly $250 million to investors thanks to three positive exits in 2008.

Catalyst owned 21% of MessageLabs Group Ltd., which Symantec Corp. bought from Catalyst and Madison Dearborn Partners for $695 million in October. The acquisition netted Catalyst nearly $146 million.

The firm also profited from the sale of wireless spectrum owner Aloha Partners to AT&T for $2.5 billion in February and from selling a portion of its stake in Oneida Broadband to SprintNextel for an undisclosed amount in March.

Catalyst Investors invests in companies with either a recurring revenue stream or that are supported by advertising, such as telecommunications, Internet and media companies. It writes checks between $5 million and $30 million and seldom uses any leverage.

Rich acknowledges that it’s been slow to put money to work this year. “We’ve only done one new deal in the past 12 months,” he says.

Part of the reason Catalyst has been taking such a measured pace is that it isn’t seeing deals that have adjusted to recessionary expectations. “We felt the prices haven’t come down to be reflective of what the ongoing value is,” says Rich, who suspects that valuations are still due to “come down quite a bit.”

Private companies can actually be more expensive than comparable public companies. Many companies are actually trading at market capitalizations that are less than the cash they have on hand. “The public markets may have overcorrected,” says Rich. “It’s a short lived thing that the valuations are so out of whack.”