The European private equity market notched up its best year for four years in 2004, according to preliminary fundraising, investment and divestment figures from the European Private Equity and Venture Capital Association (EVCA)1.
“As expected, 2004 has been a good year, particularly for investments. Overall, the outlook is positive,” said Herman Daems, chairman of EVCA and GIMV NV/SA.
The preliminary amount of equity capital invested in 2004 was €30.6bn, up from €29.1bn in 2003. This is a continuation of an upward trend since 2001, but still trails the peak of €35bn that was invested in 2000.
Investment in buyouts amounted to €20.8bn, which accounts for 68% of all private equity capital invested last year. This is a slight increase from €18bn in 2003, which gave buyouts a 63% share of the total amount that year. The focus on buyouts has been building steadily for the last five years. Back in 2000, buyouts accounted for just 41% of overall investment.
At the same time, expansion capital investment ticked up slightly to €6.8bn from €6.2bn in 2003.
“It looks like we have passed the bottom of the cycle, with venture capital funds starting to invest again. However, the flow of investments continues to move away from high-tech at the early and expansion stages,” said Keith Arundale, European venture capital leader at PwC.
Fundraising volumes were €24.7bn in 2004, down slightly from €27.1bn in 2003. Looking at the last five years – and making an exception for the unusual 2000–01 period – fundraising seems to have found a stable range at €25bn to €28bn. Many of the funds that were launched in the last two quarters of 2004 are expected to close this year, which means fundraising is likely to increase further in 2005.
Almost three-quarters of new funds were allocated to buyouts, with venture ticking up by two percentage points 24%. Allocation of new funds to buyouts was only 50% in 2000.
Glenn Bedwin, Thomson’s head of European research, said that the industry had been focused or returning cash to investors, making divestments a key theme of 2004. “Improving exit conditions are reflected in reduced write-offs and the higher amount exited through trade sales and IPOs,” he said.
Divestments at cost were €14.1bn last year, compared with €13.6bn the previous year. Write-offs declined from €1.6bn to €1.4bn, representing 10.2% of all divestments in 2004. This figure still trails write-offs of 7% in 2000, but has been falling since 2002, when write-offs peaked at 30%.
Trade sales continued to be the primary exit route, increasing to 25.2% of all divestments and accounting for €3.6bn in activity. Exits through IPOs also increased and represented €1bn, or 7.6%, of all divestments, compared with €800m, or 5.6%, in 2003.
The European private equity industry’s preliminary performance figures saw long-term horizons remain steady, although there was a decrease from 2003. The annualised net pooled internal rate of return since inception to the end of 2004 was 9.1% for all classes of private equity. This compares with 9.9% in the previous year. The IRRs are measured over the last 25 years, with final figures expected on June 16 at EVCA’s Symposium.
“Last year was a stronger year for the industry as we continue to put the last few difficult years behind us. Some of these preliminary figures confirm this, with short-term returns giving a positive indication of an improving environment along with the steady returns since inception,” Daems said.
Five and 10-year horizon returns have decreased overall, with the effects of the post-bubble years still visible. Across all stages of development, these horizon returns stand at 1.9% and 9.8%, respectively, compared with 7.4% and 11.8% in 2003. Five and 10-year returns for buyouts outstripped all other stages, at 4.3% and 11.4%, respectively.
Short-term returns suggest that the industry is turning the corner. One-year horizon returns for all private equity stand at 12.3%, compared with minus 0.8% in 2003. This is also reflected in the stage split, with one-year horizon returns for buyouts increasing to 19% from 2% over the last year. Venture returns improved from minus 8.1% to plus 1.3% over the same period.
“The short-term returns during the past year have shown a vast improvement over previous years as private equity firms have already written down most of their valuations and are now able to reap the benefits of the improving exit markets,” Bedwin said.
Buyouts remain the strongest area for three-year returns. Returns were the same as last year at 0.5%, compared with three-year venture returns at minus 6.7%, up from minus 9.6% in 2003. Since inception, buyouts have returned a pooled return of 11.4%, compared with 6% for venture capital. Generalist funds fall in the middle with an 8.6% return.
Top quartile funds – the IRR of the funds performing above the upper quartile – continue to outperform the rest of the market. Top quartile buyout funds returned 28.9%, while top quartile venture funds returned 18.5%.
While the absolute IRR measures discussed indicate overall returns, it is important to separate the realised portion (distribution to paid-in or DPI) of that return from the unrealised return (residual value to paid-in or RVPI).
As of the end of 2004, for every euro invested in private equity since inception, investors could expect a total return of 1.31 times their money. From this expected amount, 71%) has been distributed to investors and 60% is still tied in unrealised gains and losses.
Data from the UK-based Centre for Management Buyout Research (CMBOR), meanwhile, shows healthy growth in the value of the European buyouts market overall. According to CMBOR, the market was worth €80bn in 2004, with Continental Europe breaking through the €50bn barrier for the first time.
“The huge leap made in the European buyout market in 2004 shows that Continental Europe is maturing. The traditional benchmark ratio of Continental Europe to UK being 1:1 is now approaching a 2:1 ratio as Continental Europe continues to grow,” said Mark Pacitti, corporate finance partner at Deloitte, which sponsors the research along with Barclays Private Equity.
Much of this growth has been driven by significant investment from the big US players – US investment in European buyouts has nearly trebled from €8bn in 2000 to more than €21bn in 2004, CMBOR said.
European deals also tend to be larger than the UK, with 76% of total deal value coming from deals in excess of €250m. Average deal value in Europe is €85m compared with €42m in the UK.
“Although the pan-European buyout market grew by 23% in 2004 and has increased by nearly 50% in the last three years, it is clear there still remains scope for substantial growth when you look at the analysis of buyout value as a proportion of GDP,” said Tom Lamb, managing director UK at Barclays Private Equity.
UK buyouts represent 1.8% of GDP, whereas the buyout markets in all the other countries, with the exception of the Netherlands, are less than half this figure.
“This suggests that the continental European buyout market could easily double in size over the coming years,” Lamb said.
1The EVCA figures were released in Geneva at EVCA’s Investors’ Forum and were compiled by Thomson Venture Economics and PricewaterhouseCoopers from questionnaires completed by fund managers in 23 countries. The final figures will be issued at EVCA’s Symposium in London on June 16.