Europe’s VCs To U.S.: We Feel Your Pain

Thinking about heading across the Atlantic to find new deals? Think again. Europe’s got its own problems.

So say the results of a new survey from Deloitte & Touche, which indicate that VCs in Europe, including the UK, think the investing environment there is worse than ever before. And conditions don’t seem likely to improve anytime soon.

In fact, 80% of the 770 European venture capitalists surveyed said they expect the economic situation in their homeland to deteriorate further, according to Deloitte’s quarterly Private Equity Confidence Survey.

Additionally, Deloitte’s latest findings also reveal that VCs’ confidence level is at an all-time low, especially their expectations about deal activity and portfolio performance. In fact, 57% of those surveyed this past quarter said they expected a decline in the overall performance of their portfolios.

Perhaps even more disturbing is that 81% of the European VCs who responded to the survey said they expected the fund-raising process to become even more arduous.

Further adding to venture capitalists’ woes, public market exits in Europe are few and far between. However, VCs there seem to be taking the long view and holding onto their portfolio companies instead of flipping them to the public markets as they have in the past. Just 6% said they expected to stage an IPO in the next six months.

“We won’t see spending sprees just yet,” said Quintin Barry, a corporate finance partner at Deloitte & Touche. “In the current M&A environment with pressure on pricing, the VCs are unlikely to sell, unless forced, in what is most definitely a buyers’ market.”

In the wake of the worst terrorist attacks in history on American soil and the ensuing war in Afghanistan, it isn’t surprising that pessimism reigns among VCs in Europe, he added.

Down And Out?

Proving that the venture capital landscape is indeed bleak in the UK and Europe, The Carlyle Group said in October it would consider scaling back its d732 million ($657 million) European venture fund, Carlyle Europe Venture Partners. At this point, Carlyle officials are still mulling over the decision, however.

If the Washington, D.C.-based firm does decide to cut back the fund, it would likely return 10% to 20% of the capital to its limited partners. In a statement, Carlyle said that it did not believe it would need as much capital in its coffers down the line, as its investment pace has slowed considerably from previous years. Furthermore, the firm noted that 95% of the deals its European fund considers result in down rounds, which require far smaller capital infusions.

Carlyle isn’t alone. In September, Japan’s Softbank actually halved the target on its $600 million European fund and returned about $250 million to its LPs. Around the same time, the firm shuttered offices in Paris and Munich.

Further driving the point home, 3i Group PLC in November closed seven offices in the UK and Europe and laid off 185 employees, or 17% of its workforce. The firm – until recently the largest private equity player in Europe – had spent more than a year gobbling up many smaller VC outlets throughout the Continent only to find out it had grown too big too soon.

Rays Of Hope

However, not all of the stories coming back across the pond are so grim.

For example, Summit Partners, a Boston-based, late-stage private equity firm, recently decided to try its luck in London.

Scott Collins, a general partner at the firm who left its Boston headquarters in August to spearhead the opening of Summit’s UK operations, said the firm had been getting a good amount of deal flow from Europe throughout the past year and, as such, decided that establishing a presence there was the next logical step.

“Between our own searching and intermediaries, we have deals here and their numbers have been increasing. The firm felt it was time to expand,” he said.

He added that Summit did not open the office based on market timing. “Things that are hot this year,” he said. “They may not be next year, but it’s a long-term opportunity. This business is a cycle, and we are optimistic about the opportunities.”

Although Summit has not made an investment since it moved to its London digs, Collins said he doesn’t believe the environment in Europe is any worse than in the U.S.

Still, many U.S.-based VCs seem to think the investing and fund-raising environment in America has reached a plateau, and may even be on the upswing.

“It’s already fairly pessimistic here, but we have bottomed out. Getting funded can’t get more difficult,” said Paul Cohn, a partner with Mellon Ventures Inc., a Pittsburgh-based VC firm that typically backs companies in all stages.

Certain sectors, particularly storage and security, are seeing significant growth, he added. However, Cohn admitted that growth could be tied more to the Sept. 11 attacks than the overall health of the VC market.

However, Ravi Chiruvolu thinks the VC market is healthier than ever.

“For those of us committed to the field, it is a very good time to be a venture capitalist,” said Chiruvolu, a general partner with Charter Venture Capital, a Silicon Valley firm that invests in emerging companies in the communications, software and life sciences sectors. “To some degree, I feel the pain of first-timers but, if you have staying power, things are good.”

Additionally, Chiruvolu said he believes people have a tendency to over-dramatize market moves, making it harder for investments to get back on track.

“People lose perspective,” he said. “For example, if the Nasdaq goes down a hundred points today, VCs are going to be nervous about every deal that comes by, even though what the Nasdaq is doing today has no effect on a private investment. I think all VCs globally are being tested.”

Danielle Fugazy can be contacted at: