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Trends: June 2003

European GPs positive about increased disclosure; US GPs remain faithful to public institutions, but raise concerns about disclosure, global M&A down this year, but private equity share up, private equity firms more active in portfolio companies…

European private equity picks up in 2002 but technology investments continue to fall
European private equity investments in the technology sector have continued to fall in 2002 despite the fact that cross-industry investment enjoyed its second best year to date, according to the PricewaterhouseCoopers' Money for Growth survey. For European private equity as a whole there was a 14 per cent increase in the value of investments compared with the previous year. But the technology sector suffered a drop in investment of almost 30 per cent from 2001 and 50 per cent from its peak in 2000. The proportion of technology private equity investment going into buy-outs almost doubled from 15 per cent in 2001 to 25 per cent in 2002, due to the rapid rise in major corporations selling off non-core assets. But the proportion of private equity being invested at early and expansion stages fell significantly from 81 per cent to 68 per cent and the proportion invested in seed-stage projects has fallen to just a little over one per cent.
AltAssets 23.6.03

US firms believe disclosure should be limited to IRRs
The majority of US private equity firms believe that disclosure of information by public pension plans should be limited to fund performance, according to a straw poll of GPs by The Private Equity Analyst. As many as 60 per cent of the 30 private equity professionals questioned said that disclosure should be limited to fund performance, 23 per cent that nothing should be made public and only 17 per cent that IRRs and terms and conditions should be available to the wider world. None of those surveyed believed that disclosure should reach down to the level of portfolio company data. This contrasts with the 30 per cent of European firms polled recently by the European Private Equity and Venture Capital Association that said portfolio company information could be made available without harm to the industry. In another study by PEA's sister publication GP Management Report most of the firms surveyed said they would not refuse to accept commitments from public pension plans. Only 8.3 per cent said they were likely to turn down money from such sources.
The Private Equity Analyst June 2003

US venture valuations slip further in Q1 and fundraising still sliding
The US venture sector appears stuck to its downward course. Valuations for venture-backed firms slipped further in the first quarter and fundraising was the lowest since 1995, according to figures published by VentureOne. The median pre-money valuation fell to $10m in the first quarter from $10.2m in the fourth quarter and is now in a range comparable to the mid-1990s, the firm said. First round valuations fell significantly, second round financings were flat, and later rounds dropped slightly. Despite the insistence of many venture capitalists that the falls in valuations mean it is now a great time to invest, institutional investors in their funds appear unconvinced. Only $899m was raised for venture investment in the first quarter, the lowest since the second quarter of 1995.
AltAssets 3.6.03

Seed investment increases in Sweden
Investments in seed and early-stage Swedish companies rose by more than 60 per cent in the last three months compared with the previous quarter, according to a recent survey. The market for seed and early-stage finance is set for a further boost over the coming months as a number of new venture capital funds have launched and raised a total of E90m. These new funds have mainly been set up around universities or have received state-backed financing. Examples include KTH Seed, Creandum and Iteksa Ventures.
Real Deals 19.6.03

Signs of revival for UK IPO market
The UK initial public offering (IPO) market saw the first signs of life for over a year with two new trading company listings this month, according to new research carried out by KPMG. The outlook, however, remains fragile and it is too early to celebrate a recovery, the report cautions. The listing of oil and gas company, Sondex, and reinsurance broker, Benfield, bring the amount of funds raised from a total of seven IPOs to £319m for the year to date. But the IPO market is still a long way off the levels seen in the first half of 2002 when 28 new listings raised a total of £4.2bn. The UK market has taken a 75 per cent drop in IPOs by volume and a 92 per cent decline in the value of that activity compared with last year.
AltAssets 26.6.03

EVCA poll finds most GPs think more transparency will professionalise private equity
Greater disclosure of private equity fund performance would help professionalise the asset class, according to the findings of an EVCA poll undertaken in the first quarter this year. Some 68 per cent of the general partners that responded said a higher level of transparency would attract more investment to European private equity. Unexpectedly, however, some 38 per cent of respondents were happy for disclosure to extend beyond fund level to the performance of underlying portfolio companies. The poll also found that European general partners believed that in order for private equity to be portrayed in a fair light, data disclosure must be accompanied by a clear explanation of the way the asset class works. This should include an explanation of the investment life cycle, explaining that internal rates of returns are not meaningful in the early years of the fund's life.
AltAssets 4.6.03

Steady pace for Irish venture capital fundraising in 2002
Irish venture capitalists managed to keep their fundraising on an even keel in 2002, while the rest of Europe saw sharp falls in the amounts committed by investors. VCs in Ireland raised a total of E201m in 2002, only marginally down from the E210m recorded in 2001. But the amounts invested by venture capitalists themselves experienced a sharper drop last year. VCs invested E105m in companies in 2002, compared to 2001's figure of E144m.
Business World 3.6.03

European fundraising down sharply in 2002 but long term returns remain solid
The European private equity industry suffered a tough year for fundraising in 2002 but investment levels and long-term returns both remained solid. According to the official EVCA activity figures European private equity firms raised just E27.5bn last year compared with E40bn in 2001. But for the first time the UK, and not the US, was the principle provider of capital to Europe. Equally surprisingly France overtook the UK as the favourite destination for funds. The brightest element of EVCA's release was the revelation that investment in Europe in 2002 actually increased on the previous year to E27.6bn from E24.3bn in 2001. EVCA said the widespread sell-off of non-core corporate assets provided plenty of opportunity for private equity investment. European private equity returns for the year ending 2002 remained solid with an annualised net pooled internal rate of return of 10.8 per cent since inception. This compares with short-term returns, measured using one and three-year horizons respectively, of negative 9.2 per cent and positive 4.1 per cent.
AltAssets 4.6.03

UK private equity firms take a more proactive approach to portfolio management
Private equity firms are taking an increasingly proactive approach to portfolio management in the light of more challenging exit conditions, according to a report released by KPMG Corporate Finance. Insight into portfolio management 2003, produced in conjunction with Manchester Business School, said firms were devoting more time and resources to monitoring investments and employing wider industry knowledge and operational expertise in doing so. The amount of time that private equity firms spend monitoring and managing portfolios has increased by ten per cent since last year and now accounts for an average of 40 per cent of the firms' resources, the report said.
AltAssets 26.6.03

Global mergers and acquisitions continue to slow in 2003
UK mergers and acquisitions activity has continued to slow in the first half of 2003, according to research carried out by KPMG Corporate Finance and Dealogic. The number of M&A deals has fallen sharply compared with the same period last year and the total value of completed deals is also down. The analysis shows that worldwide deal volume is down by 33 per cent from 10,943 in the first half of 2002 to 7,324 in the first half of this year. The total value of global transactions stands at $464bn for 2003 to date, compared to $571bn during the first half of 2002. This represents a 19 per cent reduction in total deal value. Private equity deals represent a significant nine per cent of total worldwide activity by volume. In the UK this figure is even greater with over 19 per cent of UK activity by value and 15 per cent by number having been completed by private equity players this year. This level of private equity activity is dramatically higher than that recorded during the M&A boom in the first half of 2000 when private equity backed deals accounted for just two per cent of deals globally and three per cent in the UK.
AltAssets 30.6.03

German private equity community shrinks by a third
The number of people working in the private equity industry in Germany dropped by 32 per cent last year. Still more expect to lose their jobs this year as activity dries up, according to a report released by the Organization for Economic Development (OECD). The OECD's figures show the number of UK private equity professionals also fell, but only by eight per cent, while the number across the rest of Europe increased.
eFinancial News 16.6.03

European bankers believe things are looking up for Europe's private equity industry
Almost two-thirds of European bankers expect private equity to increase its share of the European mergers and acquisitions market in the second half of 2003, according to the latest figures released by the Cinven Index. The six-monthly survey of investment banks, which collates and analyses mergers and acquisition market sentiment in the region, also found that a third of bankers expect the overall economic climate to improve, compared with only ten per cent in December 2002. Only 12 per cent expect deterioration in conditions, down from 47 per cent six months ago. In further good news for the private equity industry the survey also suggests cautious optimism about the prospects of the IPO market with 44 per cent seeing a greater number of flotations over the next half year, compared with 21 per cent six months ago.
AltAssets 23.6.03