According to the MoneyTree survey, venture capital firms in the U.S. invested a total of $18.2 billion in just over 2,700 companies during 2003.  Although venture investing is down dramatically from the Internet boom years, the current pace of investing is just about equal to the early and mid-1990s.  Nevertheless, some apparently feel that the supply of private equity is clogged and could use a dose of disintermediation.

Most professionally managed venture capital and private equity funds take the form of 10-year limited partnerships composed of institutional investors—pension funds, endowments, foundations, and financial institutions.  There’s even a supplemental layer of financial intermediation in the form of “funds of funds” managed by the likes of Adams Street Partners that allow (relatively) smaller institutional investors to participate with the big boys.  Outside of small, new funds and some big family offices, the individual investor has few chances to play.

Apparently, humongous buyout firms such as Apollo Advisors, the Blackstone Group, and Kohlberg Kravis Roberts find such a stratified world constraining.  As reported in a recent New York Times article (registration required), these groups, and others, are going direct to the market through the offering of publicly traded closed-end mutual funds (albeit with limited partnership-like management fees and carried interests).  Apollo raised $930 million earlier this month through such a vehicle, and Blackstone and K.K.R. have filed to make offerings of $850 million and $750 million, respectively.  You, too, can be a player in the buyout world—for a price.

Between you and me, billion dollar funds—more or less—are hardly chump change, particularly when compared to the earlier stage world of VC.  On the other hand, K.K.R., since its inception in 1976, has been involved in cumulative financings totaling more than $100 billion.  So, these new—more “democratic”—public funds haven’t yet made much of a dent in the landscape.

Nor, are they new.  Since it was founded in 1979, Technology Funding has raised and managed 11 public funds.  If my memory serves me, Technology Funding pushed the limits of VC democratization at the height of the bubble by making a Web-only fund offering that allowed investors to subscribe using their credit cards!  (Now that’s something I’d like to see K.K.R. offer.)  Technology Funding is still in the game, making a strategy of co-investing alongside more traditional funds while tapping into a steady, but smallish investor pool.  Publicly traded VC funds offered to people like you and me have filled a niche.  But, maybe not too surprisingly, it seems to be a pretty shallow pool from which to draw.  Most people seem to be content to allow a couple of layers of money managers invest their pensions in Enron rather than participate more directly.

If the gross supply of capital isn’t the constraint, some see the problem in the ready identification and analysis of potential issuers of private shares.  “Entrex is a web-based centralized financial monitoring and reporting structure that allows stakeholders to easily find, research, track and manage private companies.”  These folks decry the inefficiency and parochialism of the private equity market.  Given standardized reporting and a Web portal (and maybe a little investment banking thrown in for good measure), good private deals will find investors.  Maybe.  But, while Entrex looks at the venture capital world and sees parochialism, I’ve come to perceive optimal parochialism (PDF).  Restricting one’s investing to a 50-mile radius means opportunity cost, but it has proved an effective way to mitigate the uncontractable risk that is such a big part of early stage investing.

The private equity industry is becoming more competitive and professionalized.  As one private equity friend put it to me, “This business just isn’t as fun anymore.”  Nope.  The transition from gun-slinging entrepreneur to professional manager often means a decline in the fun factor—but an increase in the absolute level of wealth creation.  I don’t expect the pressure to reduce inefficiencies in the private equity and venture capital industry to relent.  But, change is likely to come slowly.