Worldwide private equity fundraising was at its lowest level since 2003 in the second quarter of 2010, according to alternative asset industry research firm Prequin.

The London, England-based firm reports that just US$41.3 billion was raised in in Q2, reflecting, “the continuing harsh fundraising conditions for managers seeking capital.”

Preqin notes that total may rise slightly as further information becomes available, “but it is clear that the recovery in the fundraising market anticipated by many in the industry, including Preqin, has yet to occur,” it says.

The firm maintains that a number of factors indicate that fundraising conditions are set to improve later this year and into 2011. It notes that investor confidence is growing, and a recent survey of limited partners indicates that 65% expect to make investments in the second half of 2010.

It also reports that, over the next 12 months, the majority of investors will be looking to maintain their allocations to private equity, with 19% looking to increase them, and 6% looking to decrease, their commitment levels. In the longer term, over a third of investors are looking to increase allocations (36%), it adds, “indicating that fundraising will be set to increase more substantially as we move into the second half of 2011.”

Looking back at the last quarter, Prequin reports that funds focusing on the United States raised the most capital, with 46 funds raising a total of $24.3 billion. Elsewhere, 19 European funds raised an aggregate $8.0 billion, 17 funds focusing on Asia and the ‘rest of world’ region gathered a total of $9.0 billion.

Buyout funds raised the most capital, with 14 funds raising an aggregate $13.9 billion, it says. Also, five infrastructure funds raised an aggregate $6.1 billion, 15 real estate funds closed $5.9 billion, and venture funds raised $4.4 billion across 24 funds.

Fund managers are taking much longer to close their funds, it reports. The average time taken for funds closed in 2010 was 19.8 months, double the average time taken in 2004.

“Although institutional investors are growing in confidence following the recovery of private equity fund performance after the big drops we saw last year, fundraising remains an extremely challenging prospect. Preqin’s June 2010 LP survey shows that most investors (76%) are simply looking to maintain allocations in the next 12 months. While in previous years maintaining an allocation would require significant reinvestment of distributed capital from existing investments, the fact that distributions to investors have been so low means that investors have not had to invest in new funds at the same level in order to keep their allocations steady,” notes Prequin spokesman, Tim Friedman.

“With market conditions improving, the churn of capital is starting to pick up, and this will have a positive impact on new fundraisings as investors seek to reinvest distributed capital,” he added. “Another important factor to consider is that while there are still lots of funds on the road, and amongst them offerings from some top-quality managers, many of the brand-name and best-performing managers have delayed the launch of their next funds due to the current climate and the fact that they still have available capital from older vehicles. Now that deal-flow has started to pick up, there will be an increased need for a significant number of these big name fund managers to launch new offerings towards the end of this year and start of next year. It is therefore likely that we will see a real pick-up in activity as we move into 2011, helped by the plans of more than a third of investors to increase allocations in the longer term.”

www.preqin.com