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European private equity houses face realisation overhang, survey finds

European private equity firms are facing a realisation overhang as exit rates are running at 40 per cent of anticipated levels, according to research by KPMG. The virtual closure of the IPO markets has in turn reduced the availability of trade buyers and has generally depressed market confidence, the survey reveals.

'Most of our respondents expect some market recovery over the next two years or so,' said Oliver Tant, head of KPMG's private equity group. 'However, our analysis of the position suggests realisations in 2004 will have to treble in value compared to 2002 if the realisation overhang is not to increase. In this climate, the pressure is on private equity houses to be increasingly innovative in developing returns for their investors.'

In the face of more difficult exit conditions, the private equity industry has been seeking to gain liquidity and return funds to investors via alternative realisation strategies. These include secondary buy-outs and refinancings. The use of advisers to assist in exits has also increased markedly. Advisers are not only being used more often but are also being appointed at an earlier stage.

'Investors in private equity will no doubt be monitoring realisation performance closely,' said Tant. 'The challenge for private equity houses is to demonstrate their ability to recycle funds in this climate. Liquidity and derisking cashflows will be at a premium. With some of our respondents predicting consolidation in the sector, 2004 could prove to be a make or break year for some houses.'

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