European private equity and venture capital funds invested a record E36.9bn in 2004, according to the annual figures released by the European Private Equity & Venture Capital Association (EVCA.) The level of investment is 27% higher than the E29.1bn figure in 2003. This was the third year in a row that investment levels exceeded fund raising, the gap for 2004 increasing to E10bn.
The number of deals was down slightly on last year’s number; 10,236 compared to 2003s 10,375. Most of the investments, 60%, were in the form of follow-on funding, with first time investments making up the remaining 40%. In terms of amount invested, 78% went to first times, and 22% to follow on.
Exits also reached a record high in 2004, with 5,917 divestments generating E19.6bn compared to E13.6bn and 5,605 exits in 2003. Trade sales remain the most popular exit avenue, representing almost one quarter of all divestments by amount at E4.6bn in 2004. Flotations increased in number by 81%, but as an exit route it continues to be rare, with just 7% of divestments produced this way. Write-offs share of the total amount divested shrunk to 10% in 2004 from 12% in 2003.
Venture capital continued its upward trend with start-up investments, by amount, increasing by 13% in 2004 to E2.2bn compared with E2bn in 2003, although due to the busy buyout market, start-ups share of the total invested in the industry fell slightly to 6% compared with 7% in 2003. The amount invested in high-tech companies increased by 6.5% to E7.4bn, up slightly from the E7bn in 2003. In terms of expected fund allocation, venture is due to see an increase to 32% of the total funds raised (E8.8bn) last year from 21% (E5.7bn) in 2003. Seed investments declined, representing 0.4% at E148m compared with 0.5% at E150m in 2003. Replacement capital decreased to half 2003 levels.
Keith Arundale, European venture capital leader at PricewaterhouseCoopers, said: “Despite a small increase in the high tech investment amount in 2004, venture capitalists and their investors are still preferring the non high tech areas due to the higher perceived risk of tech investments and the lower average performance of the tech funds. However, it is encouraging that there have been several recent successful fund raisings for the proven technology venture capital funds in Europe which will provide much needed finance to help stimulate the sector going forward.”
The largest area of investment remains buyouts, with 70% or E25.7bn going this way, an increase from the 63% share in 2003 (E18.4bn.) Investments in expansion stage were second with 21% of the total amount invested at E7.9bn, up on the E6.2bn in 2003.
In terms of the number of investments, expansion funding leads the way with 45% of the total number of investments, followed by start-up investments at 30%. Buyouts investments only account for 18% of all the deals done in 2004. Of all buyouts by number, 97% were made up of small and mid-market deals.
The UK accounted for the largest share of amount invested in terms of country of management with 52%, France second at 14%, Germany third at 10% and Spain fourth at 5%. In terms of destination, the UK accounted for only 26% of the amount invested, with France and Germany achieving larger proportions of investments with 17% and 14%, respectively. The Netherlands came fourth at 9%.
Fund raising continues to remain stable at E27.5bn, with the UK remaining the leader in the largest amount of funds raised at E10.1bn or 37% of the total. Sweden accounted for the next largest percentage at 13% (E3.7bn) and The Netherlands third with 12% (E3.2bn raised.)
Banks continued to be the largest investor in private equity and venture capital, with E5.1bn or 22% of total funds raised, down slightly from E5.4bn in 2003. Pension funds came second with 19% or E4.5bn of total funds raised, down on 2003s figure of E4.9bn. There was a significant increase in fund raising by captives which represented 25% of the total at E7bn, up from their E5bn level in 2003 (17%.)
The figures also revealed private equity and venture capital has increased as a percentage of European GDP. For buyouts, the percentage increased to 0.26% of GDP in Europe in 2004 from 0.21% in 2003. Venture capital increased to 0.10% in 2004 from 0.08% in 2003.
Herman Daems, outgoing EVCA chairman and chairman of Belgian firm GIMV, said: “The increase in private equity and venture capital as a percentage of European GDP is encouraging. However, we’ve still got a long way to go to achieve the challenge that I set in February to increase the contribution of venture capital to 0.2% of GDP and for buyouts to 0.4% of GDP in the next three years. This would enable the private equity and venture capital industry to further enhance its contribution to European growth, innovation and employment.”