Buyout shops and mezzanine funds raised 67 percent more last year.

January 17, 2006

Buyout shops and mezzanine investment firms raised 67 percent more money during 2005 than in the previous year, marking the strongest year ever recorded, as investors flocked to an asset class with over 20 percent returns, a study released Tuesday said.

Some 159 buyout and mezzanine firms raised $86.2 billion during 2005, up from 2004 when 129 funds raised $51.6 billion, according to the National Venture Capital Association.

Buyout funds fired on all cylinders last year, with one-year returns of 26.9 percent during the second quarter, up from 22 percent during the prior-year period last year.

But the big buyout shops have found success only recently. Their five-year returns are only 2.9 percent. Part of the recent success may be the product of increased investment interest in technology.

Take KKR. The firm recently reported an internal rate of return on investment across its funds of 27.1 percent (see KKR Revs Up in Europe). The firm has become increasingly involved in technology investments during the last year, taking a stake in the $11.3-billion buyout of SunGard (see SunGard Sold and Big Deals: LBOs). It also took a stake in the $2.66-billion acquisition of Agilent’s semiconductor business (see Agilent Sells Chip Unit).

Most recently, KKR bought out Accellent, a contract design and manufacturing firm for the medical device industry, for $1.27 billion (see KKR Buys Accellent for $1.27B).

Other firms have stepped into technology as well. Silver Lake, which participated in the SunGard deal, also took out Serena Software, loaded up its balance sheet with debt, and has positioned the company to make acquisitions to support revenue growth (see Serena Software Buyout: $1.2B and Serena Plans Acquisitions).

The biggest new funds raised during 2005 included Blackstone Capital’s fifth fund at $11 billion, Apollo Investment Fund VI at $10.1 billion, and GS Capital Partners at $8.5 billion.

“The question is: where will all this buyout money be deployed?” said NVCA president Mark Heesen.

Venture Funding Best since Boom

Venture firms raised the most money since 2001, Tuesday’s study showed, despite lackluster returns.

Only one venture firm out of 30 had positive returns in the corrected data released by the Ohio Bureau of Workers Compensation data provided by Ennis Krupp & Associates (see Ohio Portfolio Data Angers VCs).

And fewer VCs saw returns between four and 10 times the money they put in—the sweet spot for an industry that prides itself on predicting the next big thing.

Only 30 of the 154 deals in 2005—19.5 percent—returned strong cash-on-cash winnings, according to a study by VentureOne. That’s down from the 21.3 percent of deals with solid returns during 2004 (see VCs Settle for a Bit Less).

Yet 182 venture firms raised $25.2 billion from investors during 2005, up 46 percent from the 194 that raised $17.3 billion during 2004.

Median Fund Amount Increases

The median amount raised by each fund is increasing, according to data from VentureOne. It hit $200 million during the third quarter of 2004, up from $192.5 million at the end of the first half of 2005 (see Small VC Funds Disappearing).

Some of the money flowing into buyout funds may be coming from venture funds which turn potential investors away, said Mr. Heesen. “Top venture firms can be very selective as to whom they bring on as investors, which does not bode well for public funds who can’t guarantee the confidentiality of data,” he said.

Still, many VC firms have raised more money just to ensure they can participate in increasingly popular mega-financing deals such as Vonage’s $200-million fifth financing or FiberTower’s $150- million fourth round (see Big Deals: VC Deals, FiberTower Raises $150M, and Vonage to Raise $200M).

About a third of the funds raised went to new venture firms, such as Spark Capital, which raised $260 million, and Clarus Ventures, made up of former MPM Capital VCs which raised $500 million (see $260M for Digital Media Fund, $500M Life Science Fund Closes).