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The madness continues. Private equity funds have had their second most productive quarter in history, raising $162 billion in the second quarter of 2008, according to Private Equity Intelligence, Ltd. (Preqin), a London-based research firm. It seems as though slowdowns in deal flow and continued trouble in credit markets have not dampened investor interest in this asset class.

The private equity space has presented unique challenges in the past few years. Fundraising has grown to record levels for the past several years, according to Preqin data. Yet, much of the industry’s capital remains unproductive. $820 billion—or approximately 40 percent—of capital invested in private equity funds has yet to be invested by the funds in business opportunities. The money continues to sit on the sidelines. Of course, unproductive capital does result in a performance drag on the funds themselves, which would make these investment opportunities seem less attractive.

But, the capital continues to flow.

The $162 billion invested in private equity funds in the second quarter is $10 billion greater than the first quarter total, and brings total invested capital put into private equity funds to $314 billion for 2008. While this is slightly below the $321 billion raised by the half-year mark in 2007, Preqin says that the numbers are not final yet, and that the adjusted total is expected to be higher than last year.

Prosperity has not been universal in this corner of the market. Investors are becoming pickier, the Preqin data suggests, with distressed debt funds and infrastructure funds leading the pack. Funds raised for the former topped $28 billion, with more than $11 billion for the latter. Both have grown substantially. Meanwhile, buyout fundraising has declined from the first quarter to the second. Still the largest sector of the private equity space, buyout funds raised only $46 billion in the second quarter, down from $61 billion for the first quarter.

Money continues to pour into private equity, but the underlying market dynamics do not appear to be changing. More capital will continue to chase a smaller number of high-quality deals, leaving fund managers—and investors—with the difficult choice of walking away from an opportunity or possibly overpaying for it. Until the influx of capital slows, the scarcity of deals relative to investable assets will not be resolved.