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Trends: June 2001

EVCA figures show record year, worldwide M&A dives, secondary buy-outs on the increase, European tech investing higher than ever…

EVCA figures boast a record year - but what about next year?
European private equity and venture capital firms invested a record E34.9bn in 2000 and pension funds became the largest investor in the asset class for the first time since 1995, according to figures out last month from the European Venture Capital Association. The E34.9bn invested by Europe's burgeoning private equity industry increased by 39 per cent on 1999's figure of E25.1bn. Firms also raised a record amount at E48bn - a staggering 89 per cent rise from E25.4bn in 1999.

The figures overlook the two-track nature of European private equity, according to one participant quoted by eFinancial News (14.6.01). Europe is dominated by the UK's more mature market, he said, adding that continental Europe was ten years behind. The UK accounted for 37 per cent of Europe's total funds raised.

One of the more impressive figures, said Red Herring (21.6.01), was that the lion's share of European money - 56 per cent - went to early-stage companies rather than buy-outs. But, it added, it'll be difficult to repeat that with the early-stage technology sector in the dog house. Red Herring also cited a slowdown in buy-out activity and a surplus of E13bn of unspent private equity money burning holes in VCs' pockets as storing up trouble for the future. ‘More and more money is chasing fewer deals,' it said. ‘This will drive up the entry prices of deals and bring down the eventual returns that investors can expect.' Even the EVCA's new chairman Edoardo Bugnone admitted that the good times could be over - in the short term at least. He is reported as predicting that next year, Europe's funds raised and invested figures will be down by around 20 to 25 per cent, but he was optimistic that the slowdown would be less dramatic than that in the US.

The big funds with long track records and the niche funds will find life rather easier than others, predicted PrivateEquityOnline (15.6.01). The rest are in for a rough ride. ‘Many take it as given that at next year's EVCA gathering the numbers will be lower - fewer funds raised, less money invested and not as many to greet their peers.'

European VC confidence creeps up marginally
Europe's venture capitalists remain subdued about the medium-term prospects for the region's economy and their own businesses but there are faint signs of a recovery in confidence, according to the latest Deloitte & Touche private equity confidence survey. The quarterly survey found only five per cent of VCs predicting an improvement in the economy over the next six months and 55 per cent predicting further deterioration, which produced a net balance of 50 per cent expecting conditions to worsen. Although pretty bleak, that net balance represents a marginal improvement on the 55 per cent in the first quarter. There were similarly fragile recoveries in the proportion of VCs expecting better conditions for raising money and availability of debt for transactions, which Deloitte said ‘provided further evidence of a turning point in the outlook.' (19.6.01)

Worldwide M&A activity plummets
Worldwide mergers and acquisitions dropped dramatically in the first half of the year, highlighting how dramatically the business environment has turned around since the early months of 2000. A report from KPMG Corporate Finance showed that the number of deals plunged 54 per cent globally compared with the same period last year. The US and western Europe were hit hard, dropping 48 per cent and 60 per cent respectively. (26.6.01)

Secondary buy-outs on the rise
The European market for secondary buy-outs is becoming increasingly important, according to research reported in Unquote (June 2001). Initiative Europe's Secondary Buy-outs: The Changing European Buy-out Market says that 57 European secondary buy-out deals were completed in 2000, up from 47 in 1997. The majority of this activity happened in the UK, Ireland and France. Mirroring the trend for large buy-outs in the sector as a whole, secondary buy-outs have been increasing in deal size. Some were even over the E1bn mark: Punch Taverns (E1.3bn), William Hill (E1.2bn) and Cinven's E2.1bn sale of General Healthcare to BC Partners.

Private equity affected by tight debt market
Private equity houses will have to forge closer relationships with banks, expect lower returns and spend more time managing their existing portfolios rather than chasing new deals, according to a report by Ernst & Young. The Banking Market for Leveraged Buy-Outs found that uncertainty about the US economic slowdown was making UK senior debt lenders nervous. As a result, the trend for fewer, larger buy-outs is set to continue, said the report. ‘The time taken on a smaller deal is just as much as on a large deal, so the fee you get is very modest,' said one respondent. ‘Smaller deals are also more vulnerable in a recession.' As the debt element in deals drops and becomes more expensive, private equity firms should expect reduced returns, the report said. Firms will need to concentrate on adding value to the companies that they have already invested in, rather than making additions to their portfolios. (8.6.01)

European tech investing hits new record
European venture capital investment in technology hit a new record in 2000 and is slowly starting to catch up with US levels, according to a survey. Tech investment jumped 68 per cent to E11.5bn last year, according to PricewaterhouseCoopers' Money for growth 2000 survey. And this year looks set to maintain the blistering pace, with E15.2bn of funds already earmarked for the same sector. The report said that more than 6,500 investments were made in tech companies last year and the average deal size edged up to E1.5m. This remains some way smaller than the US average of $18.5m (E21.5bn). The UK is still Europe's trailblazer, accounting for 26 per cent of the continent's total technology investment. It invested E3bn in 2000, compared with E2.2bn in 1999. France overtook Germany for second place and made up 21 per cent of the total. (26.6.01)