A growth industry
Kevin Hall examines the figures to see what is driving private equity investing forward
Figures expected this month from both the British Venture Capital Association (BVCA), its European counterparts and US research institutions are expected to confirm the growth of the private equity market across Europe.
The expansion of this asset class is being driven by the stock markets’ performance over the past 12 months, particularly junior markets listing hi-tech and internet stock, as well as growing awareness of the earning power of private equity among institutional investors.
Last year's statistics from the European Venture Capital Association (EVCA – see Figure 1) showed some startling country advances in terms of funds raised and one or two disappointing stories. Norway and Ireland were almost off the screen with year-on increases of over 450%, while Denmark effectively was off the scale seeing an increase in new funds from E2m to E46m. But these were relatively new markets, and lagged well behind the more established countries.
Of the latter, France was the most successful in raising new funds, whilst Britain and Germany saw negative growth. Marc Whiteside, head of data and securities at Initiative Europe, says France continued to perform strongly last year. “France has been a strong performer in terms of MBOs, whereas Germany has failed to live up to the promise last year indicated,” he says.
Perhaps the surprising result for 1998 was the industry’s failure in Britain to match funds raised in the previous year, a trend which it is anticipated may be reversed when the 1999 figures become available this month.While overseas sources held up well showing a slight increase, domestic fund raising slumped by almost half. Significantly, however, funds invested continued on an upward trend. Funds raised and funds invested are the two most widely used indicators used to measure the size of the industry, the former fluctuating year-on-year much more strongly than the latter. This is due to larger private equity firms raising huge sums in excess of £1bn (e1.6bn) causing freak spikes distorting upward trends. As raised funds can take up to six years to be invested, there is a substantial lag effect.
The recent London Business School (LBS) report commissioned by the BVCA (see below) puts the recent dramatic growth in the UK down to the creation of several very large buy-out and generalist funds. Since 1997 six members of the BVCA have raised sums in excess of £500m each. This has seen the size of the average deal increase, but this trend is also evident across the channel. “The emergence of European private equity as an asset class has had a profound effect on small MBOs,” says Whiteside. “There has been a massive increase in the average deal size of MBOs as a result of the increase in money available across Europe .” There has also been a change in approach by a number of funds. Whiteside points out that 3i’s new mission statement means they are concentrating on deals with a larger than average value.
Perhaps the most disappointing statistic on sources of funds is to be found in the LBS generated table on sources of funds in the UK. It shows that over five years from 1994 to 1998 UK pension funds barely increased their involvement in the asset class (figure 2). This was in stark contrast to interest shown by their overseas counterparts.
The EVCA figures for 1998 showed that the geographical breakdown of investors indicated non-European investors providing around one third of all fund-raising. This figure looks set to rise this year as US investors are attracted across the Atlantic. Already substantial players in London and on the continent, US investors have been attracted by the increasing profile of European private equity. This is in a large part due to the dot.com revolution which has successfully transferred from the ‘New World’.
“Everything during the past 12 months has been directed towards the hi-tech sector,” says Whiteside. “In 1998 we saw strong interest in MBOs but many of the players who were involved there have now moved into private equity.”
The EVCA statistics for 1997 and 1998 (Figure 3) show that the hi-tech sector has almost doubled the amount of investment raised to over E4bn while raising its share of total investment from 23.9% to 27.8%. This year’s figures are likely to show a dramatic increase in interest in the macro-sector, particularly in telecommunications and internet-related companies.
The interest generated by European private equity among investors is, naturally, supported by the performance of the new asset class. Since 1992 cumulative private equity returns have outperformed UK equities by a substantial margin of 910 basis points and other UK asset classes by a margin of 1,270 and 1,520 bps. This means mature UK funds, those raised more than four years ago, have already returned 131% to their investors while still returning a conservatively valued 44% of the original drawn capital within their portfolios. Meanwhile mainland European funds are beginning to outperform their US peers.