Growth funds bolster Q2 fund-raising

Second quarter fund-raising jumped nearly 20% from the first quarter as 67 funds raised $6.68 billion, according to preliminary data from Thomson Financial (publisher of PE Week). Thomson Financial is expected to release final fund-raising data later this week.

Although early stage stalwarts such as Draper Fisher Jurvetson and Emergence Capital Partners each closed funds during the quarter, the biggest funds to get done were growth funds, which bouyed the fund-raising data.

Five of the top 10 largest funds raised during the second quarter were focused on growth. They include Insight Venture Partners VI, Institutional Venture Partners XII, North Bridge Growth Equity I, Sequoia Capital China Growth Fund and QuestMark Partners III. Two more funds from the top 10, HealthPoint Capital Partners II and JMI Equity Fund VI, are designed to be non-control private equity investors.

Growth investing has become increasingly popular among many VC firms, though the idea certainly isn’t new. Sequoia Capital has invested in growth stage companies since 1999, when it raised the $350 million Sequoia Capital Franchise Fund.

Other early stage players have added growth investing to their mandate since then. DFJ has been working on a $250 million growth fund since the end of December 2005. North Bridge Venture Partners closed $545 million toward its first $550 million growth fund during the second quarter.

Other firms have jettisoned early stage investing altogether, opting instead to apply their partners’ expertise to ever-expanding equity deals. Institutional Venture Partners, for example, moved away from early stage investing after Redpoint Ventures and Versant Ventures split off. IVP’s $300 million 11th fund, raised in 2004, was quickly depleted after just two deals.

IVP invested in a $132 million funding of Cortina Systems Inc., a maker of communications chips, and a $75 million late stage funding of HomeAway Inc., a provider of online classified ads for the travel market. When the firm went back to its LPs earlier this year, it asked for a bigger fund. It closed $600 million during the second quarter for IVP XII.

It’s hard to fault the logic that’s driving this transition toward later stage. After all, it means bigger fees and better returns for many VCs.

Take Sequoia Capital, which raised two funds for China during the second quarter. The early stage fund raised $220 million and expects to pay nearly $50 million in salaries and fees to its officers, directors and affiliates, according to a regulatory filing. The growth fund raised $430 million and expects nearly $97 million of its fund to go to fees.

But it’s not just fees that are attracting firms into the late and growth investing arena. The returns in this sector bested all other slices of venture investing during 2006. VCs who invested in the latest stages of a company’s development saw one-year returns of 25.2% according to data from the National Venture Capital Association and Thomson Financial. That’s more than double the 9.9% early stage investors got during the same time period.