Record amount of private equity raised — gives entrepreneurs an upper hand

The public stock market may have taken a big dive recently, but there’s more private money swashing around than ever — and it’s looking to be invested.

That’s benefiting young companies, which can negotiate for better terms when they take money from investors.

So-called “private equity” investment firms, which include those that invest money into both public companies and start-ups, have raised a record amount of money this year. As of last week, the sector raised $263 billion this year, surpassing last year’s record of $258 billion, according to Dow Jones Private Equity Analyst.

Granted, firms that finance buyouts and corporate restructuring account for the lion’s share, or about 77 percent of all the capital raised.

But venture capital firms have raised their fair share. And with hedge funds and large investors sniffing around for good opportunities (see, for example, how a firm like Legg Mason has moved to focus on start-ups such as Zillow), the supply of capital means entrepreneurs are in a stronger negotiating position. They are able to sell less of their companies to investors in exchange for the investor’s capital.

The median share of companies sold to investors in first rounds has declined to 38 percent, down from 50 percent two years ago, according to the latest Dow Jones Venture Capital Deal Terms Report, released today.

The report surveyed 375 U.S. and European companies that closed venture rounds in the twelve months through June 2007.

In most U.S. deals, investors settled for “liquidation preferences” equal to the amount they invested. Only 20 percent of companies reported a preference higher than 1x and most of those said it was 2x or less.

More information here.