A Staggering Increase in Excess of 350% in Q1 2005
by Luke Webb, Piper Jaffray Middle Market Mergers & Acquisitions

Private equity fundraising for the first quarter in 2005 remains strong, and based on an annualized run rate is expected to surpass $60 billion, the highest level since 2000.

Taking a closer look at the first quarter of 2005 activity in comparison to the first quarter of 2004 reveals a staggering increase in excess of 350%.

This demand for participation is driven by institutional investors and wealthy individuals looking for opportunities to diversify their investments into alternative asset classes. Historical trends have generally shown firms building successively larger funds when their track record demonstrates successful returns and the state of the economy is strong. As a result, many funds today are surpassing the target levels of previous funds raised.

Recent press has highlighted the successful fundraising efforts of some of the largest private equity firms, including Blackstone, Carlyle, Goldman Sachs Capital, Thomas H. Lee and Warburg Pincus. What is truly exceptional within this select group of mega funds is not only the absolute dollar amounts targeted, but also the increase in targeted fund size compared to previous capital raises by these firms.

Mega funds represented over 65% of the commitments in Q1 2005, with GS Capital Partners V raising $5.0 billion and Carlyle Partners IV raising $3.2 billion as the dominant players.

It is also interesting to note that despite a robust fundraising environment, several successful private equity firms are not increasing their potential fund size, and instead have purposefully decided to target a fund size at or even lower than previous levels. For example, Weston Presidio recently raised a $1 billion fund following their $1.4 billion fund in 2001 and Heritage Partners has
announced plans to raise another fund in the near future with a lower target than its previous $850 million Heritage Fund III.

There is certainly no shortage of firms or capital in today’s private equity market, and "success" (however defined) is still traditionally measured by fund performance and returns regardless of size.

In a highly competitive deal making environment, private equity funds are strongly focused on those factors that will create distinct competitive advantages and ultimately generate a successful track record of investments. These strategies, which vary by firm, may be driven by fund size, industry expertise and/or executive relationships. But at the end of the day, each private equity fund is looking to define
those segments of the market in which it can most effectively compete, and have the available capital and resources to support these objectives. There will always be a broad range of opportunities available to private equity funds, both large and small and those in between. While capital under management will help to define certain parameters (i.e. typical transaction size and range), success in the private equity community will continue to be determined by the ability to acquire attractive
businesses and make savvy investments.

The substantial amount of private equity capital, both existing and recently raised, is expected to keep fueling the M&A market as these funds search for the next successful opportunity.

To learn more about Recent Trends in the Private Equity Fundraising Market, contact Luke Webb at 312-920-2136.