Small Funds, Mezz Hot With Fundraising Flat

Investors are playing small ball in the buyouts market, increasing their commitments to the smallest funds while reducing their exposure to larger ones.

Overall, fundraising in 2010 was down a smidge, barely 1.5 percent, with U.S. buyout and mezzanine firms raising $64.8 billion compared to $65.8 billion in 2009.

We’ll have more — much more — in sister publication Buyouts magazine next week on trends in private equity fundraising, but in the meantime, here are a few of our findings:

When we sort the dataset according to the size of the fund target, every category was down from 2009, except what you might call microfunds. Megafunds did worst, with commitments to funds larger than $5 billion down nearly 40 percent to $7.8 billion. The only category to show growth was the smallest funds, with those with targets of less than $300 million, which more than doubled to $3.5 billion in commitments. We don’t have targets for every fund we track, so there is a grain of salt if you want to take it.

Investing in distress remains the most popular buyout strategy, in terms of commitments by limited partners, with $11.9 billion raised in 2010. In fact, for the three years that Buyouts has tracked the market this way, this has been the No. 1 strategy every year. Perhaps investors see that as the fastest route to outsized returns.

At the other end of the spectrum, the least popular strategy is growth equity, with $1.9 billion in commitments last year, down more than 60 percent from the prior year. Could it be spillover from the tarnish that is on venture capital?

The other number that jumped out at me was $7.4 billion, the amount pledged to mezzanine funds last year, and more than double the 2009 tally. We have historical data on mezz going back to 1996, and It turns out that this is a notoriously volatile category. But if you toss out the bubble years of 2005 to 2008, when total fundraising for buyouts and mezz topped $150 billion annually, 2010 would rank as the second highest total for mezz funds ever.