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January 1, 2002

Private Equity Booming

By Colleen O'Connor

Over the last five years, a whopping $236.29 billion has been poured into privately-held companies, according to Thomson Financial's VentureXpert in Newark, N.J. That's more than the $226.84 billion raised by initial public offerings in the same period.

Sure, these days venture capitalists are spending more time nurturing their existing portfolio companies than ferreting out top-dollar deals.

But, just as investment bankers didn't take a year off because of a bear market, investing in private companies took place at a fairly solid rate last year.

Still, there seems to be two schools of venture capital thought.

One suggests the existing market is good, at least in the private sector, that the time to invest is right now, especially with valuations at an all-time low. The other school comprises investors who haven't taken their heads out of the dotcom clouds, and don't see the silver lining.

Positive View

Whatever way it is approached, it's time to stop dwelling on how things have gone from boom to bust in the past 18 months and more, experts say. The fact is things really aren't all that bad.

Fallacies abound about the magic of the year 2000. While the boom market of that year contributed hefty amounts to both figures cited above, it certainly didn't raise enough to account for all of it.

In the wake of the post dotcom tech wreck, it would seem that start-ups would be at the bottom of venture capitalists' wish lists for prime investments.

Actually, the opposite is true. According to VentureXpert, $609.9 million in venture capital was poured into 97 upstart companies, in the nine-month period through Sept. 30, 2001.

Yes, when compared side-by-side with the same period in 2000 (when 106 start-ups received $890 million) the numbers have dipped.

But consider that in 1999, 90 such companies raised $630.1 million. In 1998, 76 start-ups received $297.1 million. Back in 1997, just 55 such companies raised $216 million.

Taking all that into account, perhaps the myth of 2000 is perpetuated in part because of the lack of initial public offerings that came through the pipeline last year.

As of early November, the 2001 IPO market raised just $28 billion, its lowest level in five years.

Interestingly, start-ups also were a large part of the market psychology that prompted a record-breaking $58 billion to be raised in the public markets in 2000, when the new economy' routine of revenue multiple counting was alive.

Initial public offerings may sound more exotic than the arduous private fund-raising process, but does that mean they always lead the capital-raising dance?

The reality is, over the last five years, both have stepped on each other's toes.

In 1997, IPOs raised $43.6 billion, followed by $38.9 billion in 1998. That's more than the $17 billion and $22.9 billion raised, respectively, in private equity during both years.

By 1999, the two were nearly even, with $57.9 billion flooding in from the public markets. Private investors pumped in $57.2 billion.

By 2000, private equity dwarfed IPOs. The former pulled in $106.1 billion back then, while the latter garnered just $58.1 billion. And last year, once again, private equity dominated, pulling in more than $32.8 billion compared to the some $28.1 billion for IPOs.

Post-Dotcom Era

Hence, it seems the private equity well has not run dry. After raising an awesome $236.29 billion in just five years, venture capitalists are unlikely to decide the market doesn't work for them anymore.

In fact, all other stages of financing - early, expansion and later stages - continue to show activity in the post-dotcom years.

Last year, 840 companies received $7.2 billion in early stage financing, a figure that excludes seed and start-up funding. Expansion rounds have raised $16.3 billion for 1,354 companies. All told, 447 companies received $6.3 billion. (All figures are for the first nine months of 2001).

Colleen O'Connor is an associate editor at The IPO Reporter, published by Venture Economics, a Thomson Financial Company.