Although the European Venture Capital Association is still compiling data for last year, early signs suggest it’s going to make pretty poor reading. Despite a number of large buyout funds closing towards the end of 2002, as well as a few early stage closures, the figures are likely to be little improvement on a lacklustre 2001.
“As far as we can see,” says an EVCA spokesman, “there’s been no significant turnaround in the market.” Nevertheless, managers across the region report a healthy interest in private equity and say that money is still being invested.
Admittedly, small and medium-sized funds continue to hold off but the larger funds are committing- NIB Capital, Europe’s largest private equity manager, is investing e2bn annually. Dan Allen of Wilshire in Amsterdam says: “for top tier funds that have performed according to expectations, there is money available; it’s not as if there is a lack of money in the system for quality investments.”
The fortunes of the industry have varied significantly according to category- early stage venture capital elements have been hit badly while the less risky, later stage buyout funds have fared better.
On the investment and buyout side, the Benelux region only has a handful of companies in operation- 3i and CVC spring to mind whereas, on the venture capital side, the market is overcrowded, particularly with smaller, local companies.
“The really big issue at the moment is the venture capital community, particularly in the Netherlands. There are a number of groups under stress and, in retrospect, there were probably too many venture capital firms,” says Allen.
The industry in Benelux, as elsewhere in Europe, is being hit due to the type of original investors- insurance companies, high net worth individuals, banks and corporate venturing money. “Many of these investors are inexperienced in private equity and they don’t really have the long term commitment or they underestimated the risk and so some want to reduce or exit private equity,” says Allen.
The evidence is there to back this up as a lot of the larger venture capital funds cut back their capital bases. Prime Technology, a specialist IT fund backed by ING and Adam Street, has cut it staff and halved its e100m fund after ING bowed to shareholder pressure to slash its venture capital investments. HarbourVest announced it was cutting investment in NeSBIC’s converging technology & e-commerce fund which reduced its original closing size of $257m to $140m.
Tycho Sneyers, head of business development at LGT Capital Partners, says: “clearly some people will stop committing for a while until they see distributions on their existing portfolios. A lot of investors are continuing to commit but continue typically more on the buyout side than the venture side. A couple of the very big players will continue to commit to all the areas of private equity.”
Despite a gloomy couple of years for venture capital, most expect the industry to recover after what they see as a correction.
But this equilibrium is likely to vary across the Benelux region according to how badly pension funds have been hit. The Dutch industry is more mature than Belgium’s so funds have typically been invested longer and have savoured some of the three figure returns of the mid and late 1990s.
Says Sneyers: “Those funds that started investing in the late 1990s and started building a private equity portfolio from scratch in those days, that’s a different story- they’ve only seen bad returns and are now coming under enormous pressure.”
Ad van den Ouweland, Robeco’s head of private equity, says this has had a knock on effect. “People are a little wary of venture capital at the moment. It’s not just the Netherlands, it’s the same in the Nordic region and in Germany and France. The majority of deals are in the less risky mid and large sector buyout area.”
Robeco, somewhat fortuitously as van den Ouweland concedes, remains underweight on venture capital and is now trying to work out whether it is time to make further commitments. “Most of the 1999 and 2000 venture capital funds have had quite disappointing results. If you’re underweight, as we are, you have to ask whether this is the time to move ahead and to push venture capital in your portfolio,” he says.
On the fundraising side, 2002 was little better than the previous year. Van den Ouweland says that existing private equity investors have, if at all, added to or re-appointed the funds the already invest in opposed to appointed new funds.
There was much fanfare when van den Ouweland, formerly PGGM’s head of private equity and Harrie Meijers, ABP’s equivalent, joined Robeco almost three years ago and soon after announced they were raising e500m for a global fund of funds and e200m for a European equivalent.
In fact they have only managed to raise around $200m and have placed roughly half of this. “The fundraising climate has been a challenging one for the whole industry and so we have not reached that landmark,” says Van den Ouweland.
Fundraising in the Netherlands has been trickier as one of the overriding issues for many schemes is that they have lost all or most of their surpluses. “On average, commitments to private equity are lower because commitment to equity are also lower,” says Allen. Nevertheless, the largest half dozen funds continue to make commitments and maintain their positions.
SPF, the e10bn railway workers fund, started its private equity programme 18 months ago and has since invested e180m in fund of funds. Maurice Simons, the fund’s private equity portfolio manager, says they have decided to increase their allocation to 5% or e500m. In doing so, the fund is also changing approach and will now select fund managers who will invest the money.
“The reason we’re changing from fund of funds to fund manager selection is due to a lack of quality fund of fund providers. Also, if you continue just investing in fund of funds, you reach the point where you run the risk of doubling up investments in your overall portfolio,” he says.
In Belgium, Fortis Bank appointed the Switzerland-based alternative investment manager LGT Capital Partners to establish and manage a portfolio of private equity funds. Within the private equity industry, Fortis has hitherto been known for its investment in European venture capital but is now looking to diversify into US buyout funds.
Sneyers says this is now common both in the Benelux region and across Europe. “Many people have suffered bad returns, especially on European venture capital and now want to diversify their existing portfolio with their buyout component,” he says. This issue is one of particular importance to Belgium where the majority of funds focus on venture capital and have therefore suffered.
Despite this, manager say funds remain genuinely interested in diversifying into private equity.
And Van den Ouweland likens the current work in the Dutch market to planting seeds for the future. “Robeco has been successful so far. We’re trying to convince more people to add private equity to their asset allocation and to tell them that their risk return profile will improve if they do. But we have to remember that it is a mid to long-term strategy. What is happening is that the stock market is dropping, people are saying that they have to protect their coverage ratios on an asset allocation basis so a lot of emphasis is on the equity portfolios they are managing. To convince them to add another category to their asset allocation, right now is our challenge.”