Europe Fund-Raising Mirrors U.S.

While private equity fund-raising in Europe dropped nearly 50% in 2002 from 2001, deal flow actually increased by 10.7%, according to a study released by the European Venture Capital Association/PricewaterhouseCoopers/Venture Economics. Additionally, buyouts fared better than venture capital with both fund-raising and deal flow.

Preliminary figures indicate that European private equity funds raised $21.1 billion in 2002, compared to $41.5 billion in 2001. However, Buyout funds had an easier time raising money from limited partners than the venture capitalists did. A little more than 60% of capital raised went to buyout shops while 32% went to venture capital funds in 2002. The numbers were fairly similar in 2001. Buyouts funds made up 56% of private equity allocation in 2001, with venture capital receiving 39%.

While European private equity firms may have had a tougher time fund-raising, it didn’t stop them from investing 10.7% more in to companies in 2002 than they did in 2001. Private equity investors put $29.5 billion to work in 2002, compared to $26.4 billion in 2001. Additionally, deal flow picked up in the third and fourth quarters. Approximately 60% of private equity investments in companies occurred in the third and fourth quarters in 2002.

Like in the United States, venture capital suffered significantly more than all other private equity sectors in Europe last year. Early-stage deals saw larger decreases in both investment and investment size. The average venture capital stage deal in 2002 was $1.3 million, down from $1.4 million in 2001. Early-stage European VC deals brought in $2.8 billion in 2002, and the average early-stage deal size dropped from $1 million in 2001 to $810,000 in 2002.

“Two-thousand-two was a difficult year,” says Max Burger-Calderon, EVCA chairman and executive director with Apax Partners, who adds that so long as economic prospects remain dim, “fund-raising will continue to experience difficulties for the coming years.”

Returns released by the EVCA showed that European private equity and venture capital returns had an annualized-pooled internal rate of return (IRR) of 11.5% for all private equity. This long-term IRR is measured from Dec. 31, 1979. Short-term IRRs were not so encouraging. One-year horizon IRR is -8.2% and three-year horizon is 4.1%. Venture capital returns had a one-year IRR of -27.6% and a three-year horizon IRR of 4.1%. Buyout returns showed the least amount of short-term losses with a one-year horizon IRR of -1.6% and a three-year horizon IRR of 5.2%.

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