Hungry LPs Flood New Funds Largest Haul in 2 Years

For nearly two years, venture capitalists have been predicting that the fourth quarter of 2003 would herald the arrival of a fund-raising renaissance.

They were right.

U.S.-based venture firms went on a tear, with 44 firms raising $5.16 billion, the largest take since 63 firms pulled down $5.84 billion in Q3 2001, according to figures released today by Thomson Venture Economics (publisher of PE Week) and the National Venture Capital Association.

The Q4 total was 2.5 times more than VCs raised between July and September and represents nearly half of the entire VC fund-raising take for all of 2003.

The buyout market also experienced a Q4 upswing, as 26 firms raised a total of $15.39 billion. Texas Pacific Group led the way by securing $5.3 billion in commitments for its fourth fund, while First Reserve Corp., Kelso & Co., Silver Lake Partners and Cerberus Capital Management all crossed the billion-dollar threshold.

“There were some deals that we had been working hard and making progress on for a while, but all of a sudden we got a major rush in December,” says Dale Meyer, a partner with private equity fund placement agent Probitas Partners. “I think that there had been a lot of pent-up demand.”

Indeed, limited partners have abandoned the capital modesty that marked all of 2002 and the first three quarters of 2003. Baltimore-based New Enterprise Associates (NEA), for example, held a $994.6 million first close on its eleventh fund after just a few months of marketing. Even a young firm like Waltham, Mass.-based Kodiak Venture Partners was able to cash in by securing $300 million for its third fund.

Some LPs have expressed apprehension at what they view as a fund-raising market that is growing too rapidly, and cited firms like Kodiak and General Catalyst Partners to make their case. “You have a lot of inexperienced people raising a lot of money right now, which might mean that we’re creating another overhang situation,” says a New York-based institutional investor. “The older firms like NEA and Charles River and Sequoia are all raising smaller funds – which still may be too large – and then you have these emerging managers like Kodiak and General Catalyst who are for some reason raising larger funds. I think it’s being driven too much by LPs desperate to put their money to work.”

The main reason for this apparent desperation is that brand-name firms are asking for smaller and fewer capital commitments than had been solicited during the previous fund-raising drives. Even the new NEA fund, which is likely to close with $1.1 billion, is a far cry from the $2.32 billion raised by NEA in 2000. That means many LPs in previous funds either can’t get their ask prices or are shut out of a new fund all together. Compounding this problem is an influx of eager money from Europe and a thriving public equities market that has inflated private equity allocations within the pension fund and endowments communities.

Don’t expect any of these trends to cease any time soon. Limited partners say that the fund-raising surge is sustainable for at least the next 12 months due both to LP demand and GP supply. The first quarter of 2004 already has seen a $268.14 million first close from Essex Woodlands Health Ventures, and final closes are imminent for NEA and Charles River Ventures. Also in the fund-raising market right now are firms like Benchmark Capital, Sevin Rosen Funds and Kleiner Perkins Caufield & Byers, while upcoming offerings are expected from firms such as Battery Ventures, Oak Investment Partners and InterWest Partners.

“I feel that we have a blue chip LP base that continues to tell us that they want us to save space for them in our next fund,” says Stephen Holmes, an administrative partner with Menlo Park, Calif.-based InterWest, which will commence fund-raising later this year. “I’m not too worried about raising the next fund.”

Email Dan Primack

Check out today’s print edition of PE Week for additional charts and data.