Not Many Shining Moments for Q3 VC –

BOSTON – 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 released last month 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.

A preliminary look at the numbers for U.S.-based companies, shows that less venture money was put to work between July and September of 2001 than in any three-month period since the first quarter of 1999. Even worse, one would have to go back to the third quarter of 1997 to find a quarter in which fewer companies received funding.

Third quarter 2001 numbers show that 852 companies received just over $7.49 billion. That represents a 32% decrease from the $11.15 billion raised in the second quarter of this year, and a staggering 73.7% drop from the $28.47 billion secured in the third quarter of last year. Typical deal size was also down from recent quarters, with companies averaging just $8.79 million per round.

It is important to note that Sept. 11 did affect the final numbers, although not so severely that a third quarter 2001 unhindered by such an astronomical tragedy would have made up the difference. Just 19% of total third quarter disbursements were made following Sept. 11, compared with 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 & Co.

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, in a bit of an upset, companies from the Greater New York region raked in more money than from any other area with 18.42% of the total take. Northern California followed with 13.56% while New England came in third with 6.96%.

Fund-Raising Figures Also Down

Perhaps sensing that decent investment opportunities are few and far between, limited partner commitments to U.S.-based venture capital firms also took a hit.

Just over $8.51 billion was committed to 51 venture houses in the third quarter, a 16% decline from the previous three-month period and nearly a 70% drop-off from 2000’s third quarter. The last time so little money was raised was in the third quarter of 1998.

If U.S.-based buyout and mezzanine funds are thrown into the mix, the total third quarter capital grab totals $17.94 billion for 82 firms marking an 18% drop off from the second quarter and a 58% decrease compared with last year’s third quarter.

The third quarter 2001 leader 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 five 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; and Charlesbank Capital Partners with $494 million.