NEWARK, N.J. – Venture capitalists in the United States raised a record $22.2 billion last year, beating 1997’s figure by about $9.4 billion, according to preliminary data compiled by Venture Economics Information Services (VEIS), a sister company to VCJ.
It is important to note, however, that $5 billion of last year’s take came from Warburg, Pincus Equity Partners, L.P. The fund’s management company, E.M. Warburg, Pincus & Co., L.L.C., often is recognized as a buyout firm by the private equity industry, but VEIS classifies this particular vehicle as a venture fund.
Regardless of the Warburg Pincus contribution, venture capitalists would have set a new fund-raising record of $17.2 billion, outpacing 1997’s $12.7 billion and 1996’s $9.3 billion totals.
Not surprisingly, the average target size of individual venture funds and the amount of capital each raised also grew in 1998, with the average venture fund pulling in $124 million and targeting $178.8 million, compared to $82 million raised and $95.9 targeted in 1997, according to VEIS. The same figures would have been $96.6 million and $141.4 million, respectively, without the Warburg Pincus fund.
The increases are logical, said Pat Mitchell, chief investment officer of the California State Teachers’ Retirement System (CalSTRS) because, as the venture capital pie gets larger, individual firms increase their fund sizes to maintain their proportionate piece of the pie. CalSTRS encourages private equity partnerships to up their fund sizes so that the big players can devote more money to the industry, he said.
Record-breaking numbers in venture fund raising have been the norm since 1996, but some in the industry are beginning to question whether 1998 will mark the end of just another auspicious cycle in this sector.
“The question still remains, have we reached a peak?” asked Leslie Brun, chairman and chief executive of Hamilton Lane Advisors, Inc.
Mr. Brun said private equity is at or near an “absolute” peak because big, institutional, long-term investors have filled their plates with venture capital in the last few years. Such heavyweight investors are now going to seek opportunities that will plug holes in their investment strategies, rather than devote large sums to the sector, he predicted. For example, Mr. Brun pointed to the mammoth California Public Employees’ Retirement System (CalPERS), a major VC investor seeking to reduce its stable of managers.
Mr. Brun does, however, expect smaller institutions and high-net-worth families “who were late to come to the party” to invest in venture capital this year, as well as union pensions covered by the Taft Hartley Act. At the same time, venture capitalists must continue to compete with their buyout and international venture counterparts for private equity dollars, Mr. Brun added.
Venture capitalists have pension funds to thank for last year’s largesse. Having provided roughly one-third of the total capital raised each year since 1994, pensions threw in a much bigger piece of last year’s total, putting up 60%, or about $13.32 billion, of the capital committed.
Meanwhile, insurance companies and banks all but vanished from the scene, representing less than one-third of one percent of the total capital raised in 1998, a severe drop from the previous year’s 5.4%. Capital coming from banks and insurance companies was 3.3% in 1996, 8% in 1995 and 11.7% in 1994.
Endowments and foundations also have become a smaller part of the VC fund-raising world, representing only 6.2% of last year’s total from 13.2% in 1997. In comparison, foundations and endowments provided a considerable 27.3% of the total in 1996, 21.3% in 1995 and 17% in 1994.
Corporate interest in venture funds historically has risen and fallen, this year falling to 17.8% of the total from 24.5% in 1997. Corporate investors provided 22.2% in 1996, 14.8% in 1995 and 15% in 1994.
Accel Partners’ Jim Breyer also expects a slowed fund-raising pace in 1999 but said the traditional big players will maintain their dominance. The managing general partner points to the public markets’ overall sluggish performance in the second half of 1998 as a major reason for a projected fund-raising fall-off. Internet companies continue to expand dramatically, and public market valuations remain frenzied ; however, infrastructure, enterprise software and health-care companies have not been so fortunate, he noted.
“My expectation is that the pace of investing in segments other than the Internet will slow down versus a year ago or two years ago,” Mr. Breyer said. “At the same time, the Internet company formation pace continues to accelerate. With these divergent trends, my expectation is there will be at some point in 1999 a significant cooling off of public market Internet valuations and, at the same time, a general slowdown in venture capital fund raising overall.”
Sovereign Financial Services Inc. Managing Principal Katie Cattanach has her eye on the public markets as well, because when the markets slump, so do the market values of her clients. If there are smaller investment pools, then naturally there is less to invest in private equity.
But that has not been a problem for $93.5 billion CalSTRS, which still is clawing its way to a 5% private equity allocation. Of that 5%, 15% or $700 million, is slated for venture capital.
In 1998, CalSTRS committed $1.48 billion to all private equity investments and actually invested $610 million, but it received $410 million in returns during the year.
CalSTRS intends to invest some $150 million to $225 million in venture capital this year in chunks of $20 million to $25 million, Mr. Mitchell said.
Dr. Cattanach said pensions are drawn to private equity because they realize that the asset class is a legitimate, permanent part of a well- diversified portfolio, and on a risk-adjusted basis, private equity should yield higher returns than the public markets.
She expects to see more funds coming to market in early 1999, including “next generation funds,” such as spinouts and firms going forward without their founding partners, who may be retiring.