Have we seen a peak?
If the private equity market could have been said to have followed the dot com surge of 1999, then most analysts would agree that the crash of the new technology stocks during 2000 was the most reliable signpost to the health or otherwise of the market.
Ludovic Prevost at Fondinvest Capital in Paris says private equity has shadowed the equity market during the past 12 months. “After the crash of the net stocks we have seen the curve of private equity investment adopt a less aggressive development over the past six months following on from a dramatic growth in such investment from 1996 until mid 2000.” Although it is difficult to be too precise on the figures, there is little doubt that investors have been concerned about general developments in the equity markets. “There is no question but that the business in France is simply not growing at the same pace as it was previously,” says Prevost.
This can be seen, however, as part of a general cycle, not only in France but also across Europe. “From 1995 to 2000 we have seen an aggressive development of the business across Europe, both in terms of a plethora of investment opportunities and the movement of cash from other markets to private equity,” says Prevost. This combination is, of course, the perfect engine to drive any market, but it seems we may have seen a peak.
This does not mean that the funds have dried up, indeed last year the difficulty for most managers was that they were cash rich. This was a result of the lack of investment opportunities as markets contracted in the wake of the collapse of new technology indices.
Prevost points out that although there has been less interest from the larger institutions during the past six months, private investors and the retail market continue to have faith in private equity in France. “We are entering a new phase for the private equity business which may last three or four years. This period will be driven by marketing, and the successful managers will be strong in this area, and fund of funds will be a good approach for managing that kind of risk.”
Clients with funds to invest are now in the driving seat in France, Prevost believes. “As managers we must now begin to adapt to this situation, and modify our products to match the needs of our clients,” he says.
With many investors unable to take a stake in what were over-subscribed funds last year, it might have been thought that they would be lost to the private equity business, but this is certainly not the case in France. “Many large French institutions are in the process of developing a private equity business on the retail side,” says Prevost. “This is a clear indicator that the business has a strong future here in France. In the past there have been regulatory and taxation problems with this kind of investment, but that is changing.”
Such optimism stretches across the border to Belgium, where KBC, the Belgian commercial bank, announced last month that it is to enter the private equity market. The Brussels-based bank is trying to raise an initial €50m with a final target of €100m for its first private equity fund, which will begin specialising in the biotechnology sector. It is anticipated that typical investments in the fund will range from €2m-€4m. The fund will be quoted on Euronext from March 12.
Youri Amerijckx, who will manage the fund, said “We are not planning to define how we invest in certain regions. The fund will invest first in publicly quoted companies so that we are invested from day one. These will be primarily US stocks because US companies in the sector are more mature. But we will not be as biased towards the US in our private equity investments.”
The fund’s strategy will be to invest in companies shortly before they list on public stock markets. Amerijckx says the bank have identified over 1,000 companies in the US and some 350 in Europe which would be suitable vehicles for the new fund. “Although these are start-ups or relatively new companies, which we are not interested in at the moment, we believe that many of them will grow quickly and be ideal investments for us,” says Amerijckx. “Although we cannot guarantee anything, we do believe that there is real growth in the market set to match the funds available for investment.”
The bank said an analysis of 64 companies that went public in 1999 and 2000 showed a sharp rise in company value between the last round of private equity financing and flotation. Average growth was 174% over a standard eight-and-a-half month period.
Amerijckx’s colleague Floris Van Sina at KBC Invesco in Brussels is confident that the new fund will be attractive to institutional investors due to its listing and the added liquidity it offers. “There are also tax advantages for investors such as insurance companies and pension funds. Normally capital gains and dividends are double taxed, and so we have set up an alternative fund called KBC Bioventures, dedicated to private equity investment. It is aimed at Belgian investors but we are confident it will attract interest from around Europe. Both the Bioventures fund and the Biotech fund will be managed by the same entity, and fed from the same cash pool. Each time we take a private equity stake, the money will come from both funds proportionate to their current cash holdings.”
The KBC funds are the first industry-specific funds to appear in Belgium, although there is new technology fund, which has a broader sector-based philosophy.
The Netherlands has shown less enthusiasm for alternative investment than many of its neighbours, despite the fact that the market took off in the early 1980s. By the end of the decade, however, the bulk of investors put their programmes on hold, and only a few went on. With so few players in the market, although they expanded their programmes, the overall market stagnated. At the beginning of the 1990s there were few opportunities in the Dutch market, and so investors looked overseas. Frans Schaik at Go Capital says that they are becoming more popular among institutional investors. “Equities have been such a good place for such a long time that people did not look elsewhere. With equities rising some 20% on average over the past 20 years, many think we have reached a peak, and the last year was a nasty reminder in that respect. Consequently managers are looking at alternatives that will provide respectable returns, and certainly private equity is seen as a growth area, despite some of the worries about start-ups.”
Despite this view, and the fact that available data suggests private equity is out-performing equities, it has to be said that some of the country’s largest banks and asset managers have been reluctant to embrace private equity. Banks such as ING have barely scratched the surface of the market although a spokesman for the bank in The Hague suggested a reason for this. “There have been some initiatives in the Dutch market of late, but these mainly involved dot.com start-ups. The fall out from this has meant that there has been a reaction among institutional investors which means that it may take some time to reverse sentiment.”
The problem of associating private equity with venture or risk capital, is one addressed by Ad van den Ouweland at Robeco in Rotterdam. “Private equity is much more than venture capital. In many European countries it is viewed as that, but it is important to diversify across development stages. Diversification should be across countries or regions, over life stages, venture capital, development capital and buy-outs, and across time. Do not put all your money to work in one year, but across a period of time.”
Of the current players in the private equity market the majority are pension funds, says van den Ouweland, and they tend to invest in funds, as it is labour intensive to develop the portfolio efficiently. “The best strategy for a pension fund is to diversify internationally, as the Dutch market is very limited. Any pension fund looking to enter the private equity market would be advised to use a fund of funds.” Robeco is set to launch a new fund later this year in an innovative move for the Netherlands.