Investment spigot is open
Money, money everywhere.
Boston's private equity firms are in the midst of unprecedented fund-raising that will fuel even greater levels of investing over the next several years. Endowments, pension funds, and other institutional investors are throwing as many billions at them as they can handle.
The example of the moment: TA Associates closed yesterday on two new funds that will invest $4.3 billion combined. Its new private equity fund will invest $3.5 billion, and an accompanying subordinated debt fund will manage another $777.5 million. TA's last offering combining private equity and subordinated-debt funds raised $2.5 billion in 2000.
Coming soon: Bain Capital may close two new private-equity funds approaching $10 billion combined as soon as Friday, almost certainly within the next two weeks. They will represent Boston's biggest-ever private equity fund-raising effort and place the new Bain funds in an elite class among the largest anywhere. Thomas H. Lee Partners is raising money, too. It is expected to create a new fund in the $8 billion range.
These fund-raising efforts and other, smaller campaigns around Boston will lead to even greater investing clout. Private equity firms dip into money contributed by limited partners and then borrow more cash from lenders to leverage the investing power of their funds.
Private equity firms amassing giant new funds is hardly a local phenomena. Leading firms in New York and elsewhere, such as Blackstone Group LP, Texas Pacific Group, and Kohlberg Kravis Roberts & Co., are raising record new funds. Apollo Management LP raised a new $10 billion fund last year.
''There's just tons of money, it's unbelievable," says Kevin Landry, chief executive of TA Associates. ''This bubble will get even bigger."
Institutional investors have the appetite for very big funds for two reasons. Institutions have embraced private equity more enthusiastically as a type of investment that can reliably generate better gains than conventional stocks. They also have noticed that private equity firms find deals in the kind of size and volume to put big money to work.
The $11.3 billion purchase of Sunguard Data Systems Inc. and the $15 billion acquisition of Hertz Inc. were only the highlights among $246 billion of transactions by buyout firms last year. The largest transactions have been made by groups of big private equity firms acting together as the buyer in so-called club deals.
Of course, big returns sought by investors managing many billions of dollars come with risks. Those investors have overwhelmed other types of alternative investments, like hedge funds, with their avalanche of cash. Maybe private equity firms can manage that problem, but it is a real reason for concern.
Private equity firms also have benefited by low interest rates, which make their leverage in big transactions even more profitable. Rates are going up, though private equity investors say that poses no problem. But it's hard to imagine higher rates and tighter credit won't matter, especially if the economy heads downhill.
Firms that invest in big leveraged recapitalizations, like Bain and Lee, depend on borrowing conditions to make competitive bids. Other firms like TA Associates, which focus on rapidly growing companies, must find more good investment targets than ever when their funds expand.
But institutional investors are not focused on any of those issues today. Landry says those limited partners estimate what a diversified stock portfolio should earn, probably around 8 percent a year by current forecasts, and look to do better by perhaps another 6 percentage points. That's a total return expectation of perhaps 14 percent, not a tough number by the standards of many private equity firms.
The new generation of private equity funds will get off the ground this year, stuffed to the gills with money. It will take years to determine whether that's a blessing or a curse.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com. 
