Buyout Firms Invest Record $40 Billion in Cash in Third Quarter

Private-equity firms invested a record $40.1 billion of cash in the third quarter as global credit markets remained tight, according to an industry report.

Equity investments rose from $36.4 billion in the second quarter and $17.8 billion in the first quarter, the Washington-based Private Equity Growth Capital Council said today in a report. Year-to-date equity investment climbed to an all-time high of $94 billion, topping the $80 billion spent in the same period in 2007, when credit markets began to freeze.

“There’s quite a bit of capital that’s in reserve that needs to get to work,” Jason Thomas, vice president of research at the council, said yesterday in a telephone interview.

Firms are sitting on more than $400 billion in capital commitments they’re trying to invest, according to London-based researcher Preqin Ltd. They’re putting up more of their investors’ money, spending it on minority stakes and smaller, faster-growing companies as buyouts remain at one-fifth their volume in 2007.

KKR & Co., which led the record takeover of electricity provider TXU Corp. three years ago, made a new bet on rising energy prices using mostly equity. The New York-based firm is partnering to build an exploration business for unconventional energy, a person briefed on the plan said in July.

KKR said in June it would invest as much as $400 million in a partnership with closely held Hilcorp Energy Co. to develop a shale deposit in Texas.

Carlyle Group

Carlyle Group, the world’s second-largest private-equity company, hired Rodney Cohen from Pegasus Capital Advisors to run an equity fund that will make investments of as much as $150 million, including buying minority stakes. The fund is an extension of the firm’s U.S. growth-capital business, which has largely replaced its venture-capital efforts, a person briefed on the plans said in September.

David Rubenstein, co-founder of Washington-based Carlyle, said he isn’t seeing a return of the massive purchases of several years ago.

“There is a general feeling increasingly to look at doing smaller deals that attract less attention and have a greater track record of success,” Rubenstein told reporters at an industry conference in Abu Dhabi this week. “There may be an occasional one where there have been rumors of $10 billion, but I think as a general rule you are going to see things in the $3 billion-$5 billion range.”

The private-equity council said it’s creating an index to measure the industry based on equity investment, fundraising, transaction volume and the dollar value of private-equity exits such as initial public offerings.

The index rose to 104.3 in the third quarter from 100.8 in the second quarter, according to today’s report. Its low point was 60.4 in the first quarter in 2009.

When the index stands at 100, the four components are at their 10-year moving average. The index is calculated using data from Thomson Reuters, Pitchbook, Preqin and the council.

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