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New Enterprise and Conn. firm set fundraising records


Investors are offering money to venture capitalists in a fashion not seen since the dot-com craze, though most firms are turning much of it away.

But for the second quarter of 2006, which ended June 30, there were two exceptions: Oak Investment Partners of Connecticut, and New Enterprise Associates, or NEA, which was founded in Baltimore 28 years ago.

Those firms raised record amounts, bringing in the bulk of the quarter's nationwide $11.2 billion raised - the largest quarterly amount collected in five years, according to data released yesterday by the National Venture Capital Association and Thomson Financial.

NEA raised $2.25 billion for the quarter and Oak Investment brought in a record $2.56 billion, which was the largest amount ever raised by a venture capital fund. The rest of the cash was collected by 48 other funds.

Venture capitalists invest in relatively early-stage companies, hoping the money they put in will produce big returns once the businesses reach a point of going public or being acquired. Being purchased has become the preferred method of late as the initial public offering market has dwindled. Last year, IPOs of venture-funded companies fell 40 percent to 56 from 93.

That means companies who prefer issuing stock to the public to raise funds are looking for more money from their venture capital supporters to sustain them through the rough patch.

Oak Investment Partners did not respond to an interview request to talk strategy yesterday. But NEA general partners said they raised more cash in part because they want their companies to go public, where the return on investment can be more profitable, though more risky: There's always the chance the IPO will tank.

"It's an open-ended upside," said Chip Linehan, a general partner in the firm's Menlo Park, Calif., office who was in Baltimore yesterday for a meeting. "If you sell a company, you're giving up. There's no upside in that."

He and his colleagues often evaluate their portfolio to make sure they haven't sold a company for $200 million or $300 million that later might have had a value in the multibillion-dollar range if it had gone public, he said.

During the past five years, NEA has also shifted its strategy somewhat, developing an asset class it calls "venture growth equity" that focuses on more developed companies in need of turnaround help. Such businesses take a lot of cash - between $25 million and $75 million per deal - but can pay off big, said Ryan Drant, an NEA general partner who works out of the Baltimore office.

Despite the two firms leading to the quarter's high number, predictions for the 2004 to 2006 fundraising cycle remain about $70 billion, less than half the $200 billion raised during the 1999 to 2001 cycle. Many attribute the difference to an industry having learned from its mistakes.

More realistic

"We're just turning huge amounts of money away right now, we could have easily raised double that amount, we could have probably raised $200 billion again if we had wanted to," said Mark G. Heesen, president of the venture capital association.

But "investors learned through a very torturous process that we cannot deploy $200 billion effectively. And that period was not very long ago, and they don't want to go down that road again," Heesen said, describing the current climate as a "much more realistic, prudent market."

On the flip side, however, are buyout and mezzanine funds, which are basically put toward high-interest loans made to existing companies for expansion. The expected return is in the 20 percent to 30 percent range, which can make them quite valuable if they're managed well.

For the quarter, 35 such funds raised $30.8 billion. That's half the number of active funds in the second quarter of 2005, but a 16 percent increase in the dollar amount raised, putting those funds on track to meet or beat the $94.7 billion raised last year.

Cause for concern

"While the number of buyout and mezzanine funds has steadily fallen over the past year, the dollar size continues to grow," Thomson Financial spokesman Joshua Radler said in a statement. "It appears that the mega fund is here to stay."

But that's causing concern for some, said Heesen, who believes the cash his sector turned away went to the mezzanine and buyout funds, which are reaching the levels his industry saw before the dot-com bust in 2001.

"We continue to hear concern from many [limited partnerships] about the amount of money going into buyout funds right now," Heesen said. "These are the same concerns our community had [during the dot-com era]. And our returns did suffer at the end of the day."


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