PE Funds Reel in More Than $1 Trillion

Predictions that the leveraged buyout industry is headed towards a major shakeout isn't unreasonable, but the amount of capital institutional investors committed in 2008 coupled with the amount of capital that has yet to be invested may suggest otherwise.

The private equity industry isn't finished yet.

Talk that the leveraged buyout industry could be heading towards a major shakeout isn't unreasonable, especially considering that many businesses owned by LBO firms have declared bankruptcy or are wrestling with meeting debt obligations and the recession. But, the amount of capital institutional investors committed in 2008 coupled with the amount of capital that has yet to be invested suggests otherwise.

Two of the latest beneficiaries are Toronto's Onex, which announced Friday that it had raised $3 billion for its third private equity fund, and London's CVC Capital Partners' closing on almost $14.4 billion for its fifth buyout fund. Although CVC didn't issue a news release about the new fund, a source confirmed.

Moreover, there is more than $1 trillion in commitments raised by private equity funds and $472 billion specifically in buyout funds that remains to be drawn down, or put to use in new investments, according to new research from Preqin.

The London- and New York-based alternative assets research consultancy found that 768 private equity funds secured $554 billion globally last year, marking the second-highest record year of fundraising in the industry.

Out of this amount, 170 buyout funds amassed $216.1 billion, followed by 166 real estate funds with $116.8 billion and 217 venture capital partnerships that closed on $49.4 billion. The number of distressed funds amounted to 23 that raised $42.5 billion and ranked fourth in the type of vehicles that garnered commitments last year.

The US accounted for the lion's share of private equity capital raised globally as 390 funds drew $318.1 billion. Europe followed with 203 funds worth $143.6 billion, while 175 funds from Asia and other global areas racked up $92.2 billion in commitments.

Despite the success of funds like Onex and CVC, the buyout industry's overall fundraising prospects in 2009 remain questionable. Faced with liquidity constraints and asset allocation issues, some institutional investors began pulling back on their commitments to partnerships last year. Many investors are expected to sell private equity and venture capital fund interests this years, whereas others don't plan to re-commit capital to funds they're currently invested in.

"I think there will be some [firms] that naturally fall by the wayside, maybe at a higher volume than in the past," said Paul Ciriello, managing director at Fairhaven Capital, a Cambridge, Mass.-based venture capital firm.

Fairhaven raised a new $250 million fund last year, which has made four investments in 2007 and one in 2008.

Even so, 300 funds secured more than $200 billion in commitments in the second half of 2008.

If Preqin's data offer any indication, the predicament institutions are dealing with doesn't seem to have discouraged the general partners of investment partnerships from seeking to raise new money.

There are 1,684 funds seeking to raise $888 billion, whereas the top 10 private equity fund managers collectively oversee a $197 billion war chest of commitments that they can draw upon to fund new deals, according to Preqin.

Preqin said the majority of investors remain positive towards private equity, as research in December noted that 29% of investors intend to increase their private equity portfolios in the medium to long term, while 67% plan to maintain their existing allocations.

In short, the private equity business doesn't appear in imminent danger of collapse.

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