As billion-dollar mega-funds continued to sprout amidst the past year’s economic freefall, some skeptics wondered aloud if the mammoth capital grabs were simply a vain attempt at keeping up with the Joneses.
“No, no,” said the general partnerships. The markets were far healthier than had been reported, they argued, and there would be plenty of quality deal flow to go around.
According to third quarter figures being released today by Venture Economics and the National Venture Capital Association, however, it seems that investors either miscalculated the market or lied to save face. Either way, the numbers should be unsettling to anyone reliant on an alternatives-heavy pension plan.
The final numbers for U.S.-based companies show that less venture money was put to work between July and September of 2001 than in any three-month period since Q1 1999. Even worse, one would have to go back to Q3 1997 to find a quarter in which fewer companies received funding.
Preliminary Q3 2001 numbers show that 852 companies received just over $7.7 billion. That represents a 31% decrease from the $11.13 billion raised in the second quarter of this year, and a staggering 73% drop from the $28.47 billion secured in Q3 2000. Typical deal size was also down from recent quarters, with companies averaging just $8.84 million per round.
It is important to note that Sept. 11 did affect the final numbers, although not so severely that a Q3 2001 unhindered by such an astronomical tragedy would have made up the difference. Just 19% of total Q3 2001 disbursements were made following Sept. 11, compared to an average of 27% of investments made after that date during the third quarters of 2000 and 1999.
Leading the way this quarter was NextMedia Group Inc., a consolidator of radio broadcasting and outdoor advertising companies in Tier II and Tier III markets. The Greenwood Village, Colo.-based firm closed on a $132 million deal on July 5 from a syndicate that included Alta Communications, Weston Presidio Capital Management, Thomas Weisel Partners and Goldman Sachs.
Rounding out the top five was a $108 million round for Eyetech Pharmaceuticals Inc.; a $93.81 million deal for InterNAP Network Services Corp.; a $90 million round for PhotonEx Corp.; and an $87 million financing for NuVox Communications Inc.
The computer software and programming sector netted the most capital with over $1.11 billion raised for 179 companies, while the Internet e-commerce/content/services sector came next with 142 companies netting $894.41 million.
Finally, companies from Northern California York raked in more money than from any other area with 30.53% of the total take. New England followed with 13.07% while the Southwest came in third with 9.46%.
Fund-Raising Figures Also Down
Perhaps sensing that decent investment opportunities are few and far between, limited partner commitments to U.S.-based venture firms also took a hit.
Just over $8.51 billion was committed to 51 venture houses (including $2.34 billion for five VC funds-of-funds) in Q3 2001, a 16% decline from the previous three-month period and nearly a 70% drop-off from Q3 2000. The last time so little money was raised was Q3 1998.
If U.S.-based buyout and mezzanine funds are thrown into the mix, the total Q3 2001 capital grab comes out to $17.94 billion for 82 firms. That is 18% less than was raised in Q2 2001, and 58% less than came in during Q3 2000.
The Q3 2001 leader was Warburg Pincus VIII, which closed of $2.8 billion in July. Coming in second was Berkshire Partners Fund VI, which closed on an $870 million infusion last quarter and held a final close on $1.7 billion earlier this month.
Rounding out the top eight are CT Investment Management with $845.5 million; Quadrangle Group with $680 million; Bain Capital with $617 million; Oaktree Capital Management with $616.9 million; Charlesbank Capital Partners with $494 million; Morgenthaler Ventures with $481.5 million; and Highland Capital Partners with $404.1 million.
Dan Primack can be contacted at Daniel.Primack@tfn.com