When the markets crashed and credit froze, the money for high-risk, high-reward private equity plays dried up.

The latest numbers prove that, and they show it’s going to be a slow climb back to health for fundraising for private equity firms. Private equity fundraising, including money raised for venture capital firms, took a nosedive in the third quarter, falling 70 percent from the same period a year ago.

According to Dow Jones Private Equity Analyst, an industry newsletter, 72 funds raised $25.2 billion in the third quarter. Through the first three quarters of 2009, 265 private equity funds have raised $79.9 billion, down 59 percent from last year, when 315 funds pulled in $195 billion.

The numbers show that even as the general economy has slowly improved, the pension funds, endowment funds and wealthy individuals who are the limited partners of private equity--and whose money makes private equity go—are still unwilling to make the long-term, high-risk, high-reward bets that are part of the industry. They also show that, until September of last year, when credit froze and the stock market crashed, limited partners were making bets on private equity.

Since then, those limited partners have either lost a lot of the money they would have invested in private equity, or they’re hoarding it.

What these numbers also mean is that, going forward, there will be fewer private equity firms, and they’ll be bigger. They’ll be the firms that are able to raise money in a tougher environment, thanks to past performance or big-name partners or both. And the move away from private equity could create a dilemma for limited partners such as pension funds, which turned to alternative investments to help them earn enough money to meet their obligations.

“Even as a boost in public markets provided some respite to limited partners’ liquidity issues, many continue to give general partners the cold shoulder,” Jennifer Rossa, managing editor of Dow Jones Private Equity Analyst, said in a statement. “Limited partners are still capital-constrained and more cautious about committing to firms they’re sure can hit a minimum fundraising target.”

And some major players have even started to look to get out of private equity. The New York Times reported recently that Stanford University’s endowment fund, stung by losses, was selling off some of its private equity holdings. Harvard tried to sell $1 billion of its assets, but stopped after receiving lukewarm responses from potential buyers in the secondary market. The California Public Employees Retirement System has also been looking to sell assets.

Christopher Ullman, spokesman for private equity giant Carlyle Group, said it was not surprising that there’s been a drop in limited partner investments in the space.

In the past, if you committed $500 million to a fund over a five year period, there would never be a time when you had more than 40 percent to 50 percent of your money unavailable. Now, money is coming in more slowly from all investments, and it’s more challenging to commit capital to a long-term investment in a private equity fund.

But there’s still some reason to be optimistic. “It’s a cycle and we’re seeing things pick up,” Ullman said. “Blackstone had a good deal they announced, and we’ve had some deals.”

Blackstone this week committed up to $1 billion in equity in its $2.7 billion deal to buy Anheuser-Busch InBev’s theme parks. It’s a 37 percent equity contribution, significantly more than Blackstone’s 30 percent contribution in its $20 billion acquisition of Hilton Hotels Corp. in 2007.

But even though Blackstone had to put more into that buyout, the deal is being viewed as a sign that private equity is ready to start deploying the cash it has on hand, and banks are willing to help with financing.

That could in turn become a good sign for fundraising, as potential limited partners see a more active dealmaking atmosphere.

Carlyle Group has a $13.7 billion fund for U.S. buyouts that it’s deploying now, Ullman said, and $35 billion in dry powder across 64 funds for worldwide work.

“We had raised several large funds right before or during the beginning of the economic crisis,” Ullman said.

And having capital to invest right now is important. If you need to raise funds, they probably won’t be as large in this environment as they would have been a couple of years ago.

In this environment, it’s also important to have established credentials. That’s why Vinod Khosla was able to raise more than $1 billion for his latest venture capital funds focused on cleantech. Khosla is a venture capital legend with a long history of making money for himself and his partners.

“If you’re a proven manager with a good record, those types of firms will be generally better positioned to raise capital,” Ullman said.

For others, without that kind of track record, fund raising could be difficult. And that’s where you could see consolidation in the private equity field.

Leveraged buyout and corporate finance firms took in $49.4 billion during the first nine months of the year. That was the biggest amount raised in any private equity sector. Even so, it was down 65 percent from the comparable period of 2008, the second largest drop after distressed funds, which fell 68 percent.

Buyout funds raised $49.4 billion through September, a 65 percent drop from last year’s $140.7 billion. It’s not like buyout funds weren’t out there raising money, either. It’s just that they were raising smaller amounts. The number of funds raising money was 121 through this year’s first nine months, compared to 126 last year.

Two LBO funds accounted for 26 percent of the money raised in the space so far this year. Hellman & Friedman Capital Partners VII LP closed $8.8 billion and TA Associates XI LP raised $4 billion.

Funds geared toward buying distressed assets raised $9.8 billion across 21 funds, a 68 percent decline from last year, when 17 funds amounted to $30.6 billion.