According to this report, buyout/mezzanine funds raised $86.2 billion in 2005, a new record. In 2004 they raised $25.2 billion. Venture funds raised $25.2 billion in 2005, the highest level since 2001 when they raised $38 billion but less than a third of the buyout/mezzanine fund number.
The big up tick on the buyout side is attributable to 17 mega funds which raised 67% of the year’s total. Blackstone Capital set the record for largest private equity fund ever raised when it closed on just over $11 billion in the fourth quarter.
So where will all the buyout money be spent? The report speculates that buyout funds will start acquiring venture-backed companies.
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Part of the reason the rich get richer is that only the wealthy can invest in exempt offerings. I’d love for small investors to particpate in my ventures, but the cost of a non-exempt offering can be 20% or more of a small offering. Apparently, the SEC doesn’t understand opportunity costs to a small investor being saved from a strong investment opportunity, and the profits therefrom.
Bill, we had an exchange on a related topic on Conglomerate back in November. Again, I see the separating equilibrium here where smart money has the ability to hire the best managers. Further, the capital markets are becoming more efficient, which means that large scale investors, who offer lots of capital with relatively low transactions costs, get the best projects.
Certainly, this rich-get-richer phenomenon has always been the case, but the growth of the sophisticated venture capital and private equity sector (which includes essentially no middle-class investors) suggests the possibility that the imbalance between rich and middle has to potential to accelerate.
As we continue to shift the risk of old age to individual investors by scuttling tradition pensions (that can hire high quality managers and invest in some of these alternative vehicles), I think we are kidding ourselves that this situation is not a political tinderbox.