At the halfway point of 2009, private equity firms raised just over one-third the capital they were able to attract from pension funds, university endowments, foundations and other investors in the first half of 2008. According to new analysis by Dow Jones Private Equity Analyst, the first six months of 2009 saw 173 private equity funds raise $54.9 billion, 64% less than the $152.7 billion raised by 261 funds during the first half of 2008 and the lowest mid-year total raised since 2005.

However, there are signs the fund-raising market may be thawing as the stock market stabilized somewhat in the second quarter and limited partners - institutions and firms that invest in private equity firms - gained a better grasp on the state of their balance sheets.

"Limited partners are still reeling from the extreme shrinkage of their assets under management since last fall," said Jennifer Rossa, managing editor of Dow Jones Private Equity Analyst. "Many limited partners found themselves well over target allocations and unable to commit to the asset class while others chose to sit on the sidelines altogether or only committed to the best managers, even if they did have cash on hand. As a result, any private equity firm that could afford to delay raising a fund did and those that had to brave the market in the first half of the year faced tough conditions."

In 2008, private equity firms raised a total of $287.5 billion, second only to the record $343.3 billion raised in 2007.

Buyout Funds Still the Big Draw Though the Funds Aren't as Big

According to Dow Jones Private Equity Analyst, leveraged buyout (LBO) and corporate finance funds continue to attract the largest proportion of capital investment. In the first six months of 2009, 73 buyouts funds raised $28.7 billion, 72% less than the $102.6 billion raised by 98 similar funds during the same period last year.

Notably missing from this year's fund listing are 'mega' funds, those with targets of $8 billion or more that were so popular during the private equity boom from 2006 to 2008 that many had to increase their sizes several times to accommodate investor demand. In 2009, just three funds reported investment goals over $8 billion and none had reached or surpassed their minimum targets by the halfway mark.

Secondary Funds Attract Bargain-Minded Investors

The difficult economy has many cash-strapped pension funds, endowments and foundations looking to sell their stakes in private equity funds. Secondary funds, which pool capital from investors to purchase existing stakes in private equity funds - often at a discount - have seen a big boost in investor interest.

According to Dow Jones Private Equity Analyst, 18 secondary funds have raised $13.9 billion in capital, setting a new annual record for the fund category with six months left in the year.

"It is clear that secondary fund managers are getting ready for some record deal-making," said Ms. Rossa. "Once private equity firms start doing deals again, cash-conscious LPs are going to find it difficult to meet capital calls and will likely look to sell some of their private equity fund stakes to secondary buyers."

Venture Industry Suffering Worst Year Since 2003

Compounding the recent news of decade-low deal activity and declining liquidity, the venture capital industry saw a 63% decline in fundraising in the first half of 2009. Fifty-one venture funds raised $5.1 billion during this time compared to $13.6 billion raised by in 115 such funds in same period last year. This marks the worst first-half total for venture capital investment since 2003 when 34 funds raised $2.2 billion.

The first half of 2009 saw $1.3 billion invested in seven mezzanine funds, down 95% from the record total raised a year ago, and $5.9 billion put in 23 funds of funds, down 38%.

The largest fund closing of the first half of 2009 belongs to Hellman & Friedman. It raised $6 billion for its Hellman & Friedman Capital Partners VII LP buyout fund, which is still open with a$10-billion target.