Middle Tennessee’s private equity industry showed no signs of slowing in the 1990s and early 2000s, but a number of factors, chiefly the recent rocky economic recession, have prevented several major firms from raising follow-up funds.

Still, there are signs of life in the industry. New funds have been raised, especially by firms that have focused on the area’s pre-eminence as a health care hub, thanks mainly to the creation of TNInvestco, a state program implemented under former Gov. Phil Bredesen’s administration.

“Nationwide firms have postponed fundraising, hoping market conditions improve,” says Grant Jackson, general partner at Nashville’s Council Capital, a private equity firm. “This has occurred less in Nashville due to the health care industry’s positive impact on raising capital.”

As an example, Brentwood-based FCA Venture Partners, the venture capital manager of Clayton Associates, has been quite active during the past three years. Since there is a lot happening in the health care industry in Nashville, during that time period the firm mainly invested in Nashville-area health care companies, says FCA Managing Partner Matthew King. Only one investment was made in a non-health care company.

“Most all of the companies are aimed at improving information flow or improving some kind of service in the health care industry,” King explains. “We invest in them after they’re up and going and generally have $1 million or more in revenue. They’ve been able to grow and expand their businesses nicely during that period of time. So the recession hasn’t had a dramatic effect on us because of the health care component.”

There are opportunities outside the health care industry, and FCA won’t ignore those, but about 80 percent of the potential deals the firm is seeing are health care related. Based on the investments it has been making in health care and technology companies, the firm believes the economy is improving.

“We’re optimistic about the future in the next couple of years in terms of good investment opportunities,” says King.

In 2009, FCA made about $4 million in investments, including some follow-on investments. There were two new companies added to the firm’s portfolio in 2009. In 2010, a total of about $3.5 million was invested in two new companies as well as existing companies as follow-on capital.

“The venture market is increasingly a world of the “haves” and “have nots,” says Jackson. “Those with strong performance and a differentiated story grow and have the resources to thrive. Others struggle.”

Although not always reliably comprehensive, the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters, reports Tennessee firms invested $52 million in venture capital in 2010, compared to $49 million in 2009.

Nationally, total venture capital investments in 2010 climbed for the first time since 2007, covering a broad spectrum of industries, according to the report. There also were 3,277 venture capital deals in 2010 amounting to $21.8 billion in investments, an increase of 12 percent in deals and 19 percent in dollars over 2009 amounts.

One negative aspect, noted in the report, was a drop in both first-time dollars and deals in 2010’s fourth quarter compared to that year’s third quarter.

According to Thomas Reuters and the National Venture Capital Association, U.S. venture capital funds raised $2.7 billion during this year’s second quarter, a 28 percent jump, by dollar commitments, compared to the second quarter of 2010, when 48 funds raised $2.1 billion.

In Tennessee, companies reeled in more than $12 million in venture capital funding in the second quarter, lagging substantially behind the $37.1 million in venture capital invested in the second quarter of 2010.

This year will be a difficult one for private equity fundraising, Jackson says. “While institutional investors are committing more capital to the asset class, there are many more funds in the market, making differentiation important and difficult.”

Although money for investing is still coming from traditional institutional sources, he says, there has been a shift toward consultant-directed investment decisions and away from institutional money sources.

“This has had the result of making big funds bigger and small funds smaller, as consultants find it more efficient to deploy ever larger blocks of capital,” Jackson explains. “As a result, smaller funds are turning to alternative sources, such as Tennessee’s TNInvestco program and strategic investors from within their target industries.”

T. Sidney Chambless Jr., executive director of Nashville Capital Network, attributes the “pretty good amount” of venture capital investing in the last year in Middle Tennessee to TNInvestco, which provided $200 million in tax credits to venture capital funds for the state.

According to TNInvestco’s 2010 annual report, as of Jan. 1, the program invested in 37 companies, including 23 in the Nashville area. Follow-on capital amounted to $41 million.

A recent TNInvestco transaction was the formation of Nashville-based Diagnovus by Limestone Fund and TriStar Technology Ventures, which infused a seed financing round in the start-up.

So far this year, FCA made one transaction. It invested in Silvercare Solutions, a company that provides incontinence care mostly to nursing home patients. The transaction closed in late February. FCA’s total commitment was $2.25 million and the total round was $3.8 million. FCA led the round along with the Tennessee Angel Fund, the TNInvestco fund of Nashville Capital Network. There were other investors, including some existing FCA investors.

“We are at the term-sheet acceptance level of another investment,” says King, “which we expect to complete by the end of this year.”

CA has approximately $65 million under management and two active funds. Its third fund was scheduled to finish its life at the end of this year, but its life will be extended to benefit some of its companies.