Bumper fund raising times are upon us, if you’re in the buyout arena at least, and just a quick flick through the funds section of this issue pays testament to that fact. European venture funds, however, are still waiting in the wings hoping that although today they are playing Cinderella to the big bumptious buyout funds’ stepsister, tomorrow they’ll be dancing at the LPs ball, darlings of all assembled, a position more akin to their US venture counterparts.
But it’s tough out there, quite a few of the European venture household names have gone into the fund raising market and are already back out with nothing much but their tail between their legs to show for it and a whole heap of advisory fees mounting up as they instruct third parties to review exit options for their entire portfolios in the hope of improving IRRs and cash-on-cash returns.
Hitesh Mehta left Amadeus Capital Partners, just one of the many firms waiting in the wings to get out into the fund raising market, presumably on the cards soon now that co-founder Anne Glover has just given up her year-long post as chair of the British Venture Capital Association, to go fund raising. Mehta has now resurfaced at IDG Ventures, IDG’s house fund, having been on the road marketing a new venture capital firm, Abbey Ventures. First time funds are always a brave move, but first time venture funds in a fund raising market wary of European venture and infatuated with European buyouts, (which is after all in the enviable position of being even more popular than US buyouts!) is going to be a hard slog of a sell by anyone’s standards.
For some the US comparison is the obvious answer; in other words Silicon Valley-style investing is what works and what investor will return to supporting European venture funds for. In practice there are quite literally only a handful. Add Partners, Amadeus Capital, Atlas Venture and Index Ventures, are names that get bandied around, that espouse the long term Silicon Valley view. It’s more the long term investment horizon that is referred to here, actual practice differs from firm to firm and obviously needs to given the different geographical, regulatory and so forth environments in which European firms work.
Some of the blame, rightly or wrongly, is laid by European venture firms at the institutional investors’ doors, citing their desire for quick, by venture standards, returns leading many firms feeling the need to exit an investment at a respectable multiple rather than hanging on in for another three years, for example, for a stellar return. If the names mentioned above show returns that prove Silicon Valley-style investing is applicable to a European landscape, the impetus to change this perceived or real pressure will come from the institutional investors themselves.
European venture may get a fresh glance anyhow if the overheating in the European buyout leads to the implosion of that market segment, as pundits are currently warning. Certainly buyouts are being done at higher multiples than most would like, but the exits are still coming strong; 40 alone are reported on in this issue (see exits section).
Unfortunately secondary buyouts, including one tertiary deal, account for some 14 of this total: another turn off for institutional investors who dislike seeing their investments recycled at ever-higher multiples. That aside, they are right to be concerned, given that secondary buyouts as an exit route come fourth, recapitalisations third, trade sales second and IPO’s first.