Investors plowed a record amount of cash into private equity funds in 1998, capping a seven-year run-up in this asset class.

Preliminary figures compiled by Venture Economics show 364 private equity funds raised a record $88.4 billion in 1998, up almost 26% from a year earlier.

"Private equity has had fairly significant higher returns over public markets for about 10 years, causing investors to boost allocations," said Jesse Reyes, director of Venture Economics, a division of Securities Data Co.

He said, however, that valuations for private companies mirror stock prices for comparable public companies much more closely than they did a decade ago.

"Many private equity investors think they will insulate themselves from swings in the public markets, but that's less true than it was," Mr. Reyes said.

Searching for the high returns private equity funds have realized for much of the '90s, many investors shifted toward somewhat riskier investment models last year.

More than half the money flowing into private equity funds was dedicated to start-up companies. About 25% of the capital was invested in balanced funds.

Funds focusing on more mature companies fell to 15% of the pie, from 17% a year earlier.

Much like investors in the public stock market, private equity investors have been bullish on technology. But Mr. Reyes said some venture capitalists, mostly financiers for technology start-ups, are walking away from the table when company executives make what the financiers think are unreasonable demands.

Venture Economics divides private equity funds into two categories based on their focus-leveraged buyouts or venture capital. Both areas have benefited from investor enthusiasm in recent years.

Buyout fund-raising topped $53 billion last year, a 21.2% increase. The average fund size grew to $559 million, from $460 million a year earlier.

The leveraged buyout shops, which typically invest in middle-market consumer or industrial companies, largely face pricing risk. That is particularly true now, Mr. Reyes said, because this segment is overcapitalized.

Venture capital funds, which tend to specialize in high-tech start-ups, have about the right amount of cash relative to investment opportunities, he said.

In 1998, venture capital partnerships watched their new capital commitments soar by 69%, to $23.66 billion. The average fund size increased to $132.6 million, from $94.8 million in 1997.

Market observers have been lamenting for some time that there is "too much money chasing after too few deals." This means it now takes longer to put new capital investments to work-much longer than public equity investments-said Brad Pacheco, a spokesman for the California Public Employees' Retirement System.

Mr. Pacheco said the California pension fund, the nation's largest public pension, reduced its private equity allocation slightly last year.

But Mr. Pacheco said this pension fund has a long-term commitment to private equity investments, many of which do not show a profit for about five to seven years. Most private equity funds are closed and have a 10- year fixed life.

Pension funds as a group accounted for about half of the money that flowed into private equity funds last year, up from 45% a year earlier, according to Venture Economics.

Part of that has been driven by asset-allocation models, Mr. Reyes said. The long-running bull market for public stocks has meant that pension funds must invest larger sums to maintain their typical 3.5% to 5% targets for private equity investments, he said.

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