Preliminary figures from the annual survey of the European Venture Capital Association (EVCA), confirm 1997 as a year of explosive growth in the European private equity market.
As such, 1997 was marked by an unprecedented increase in capital flowing into European private equity funds. The year’s tally totalled ecu 20 billion, 2.5 times more than the record ecu 7.9 billion achieved in 1996 (Table 1). Although dwarfed by the increase in fund raising, investment records were also broken for the fourth successive year, with disbursements growing 42% to ecu 9.7 billion, and deal numbers rising 10% to 6,252 (Table 2).
All the major European markets recorded increases in disbursement levels with the exception of Sweden, where the ecu 351 million invested last year was 16.4% below the 1996 total of ecu 420 million (Table 3).
According to the survey, the UK saw the largest absolute increase in disbursements, which rose by 49%, or ecu 1.45 billion, to ecu 4.4 billion. More dramatic, however, was Germany’s 85% increase in investments to ecu 1.3 billion during the same period. The value of the French private equity market rose by a substantial 41% to ecu 1.25 billion, after remaining relatively static during 1995 and 1996. Healthy increases in activity levels were also recorded in the Netherlands, where market value increased by 28%, and in Italy, which recorded growth of 18.3%.
Growth in investment value in some of the smaller European markets was proportionately greater, with Finland recording a 180% jump in disbursements, followed by Portugal at 85%, Belgium at 65% and Spain at 36%. By contrast, the value of the Swiss market declined 56% to ecu 55 million last year, keeping in mind that this country’s 1996 investment total was boosted by the inclusion of one atypically large transaction.
Encouragingly, investment in technology sectors – defined by the EVCA as communications, computer-related, other electronics, biotechnology and medical/health-related – reached ecu 2.3 billion last year, 71% higher than the 1996 level. This figure corresponds to a 24% share of the total investment market, compared with 20% in the preceding year. However, consumer-related deals remained the largest single sector by amount disbursed, absorbing ecu 2.1 billion, or 22% of total investments, an increase from 1.2 billion, or 18% of total disbursements, in 1996.
Although the market share of seed and start-up investments in 1997 remained modest – 7.4% of total investment, an increase from 6.5% in 1996 – the actual amount invested in early-stage deals across Europe rose to ecu 711 million from the 1996 total of ecu 444 million. This 60% rise in early-stage investment comfortably outstripped the 42% jump in total disbursements and, in proportionate terms, also exceeded the 53% growth in value of the European buyout market.
Among the major markets, the Netherlands and Germany saw the highest levels of early-stage investment, which accounted for 20% of Dutch and 15% of German disbursements last year. According to the EVCA statistics, early-stage investment accounted for only 2.2% of UK market value last year; the only major market in the same period with a lower percentage of early-stage activity than the UK was Sweden, where seed and start-up investments accounted for just 1.3% of total domestic disbursements.
Expansion capital investment as a proportion of total disbursements decreased to 35% last year from 40% in 1996 (Table 4), although the absolute amount of capital channelled into expansion deals rose to ecu 3.4 billion from ecu 2.7 billion. Almost half the total invested in Germany last year went into expansion-stage investments, a higher proportion than any other of the major European markets except Spain, where development capital accounted for nearly 65% of 1997 market value. By contrast, the level of expansion capital activity in Sweden was surprisingly low, at only 8.5% of total investment.
Among Europe’s smaller private equity markets, particularly those with relatively underdeveloped buyout markets, expansion capital tended to predominate, accounting for 77% of investment in Belgium, 85% in Denmark, 54% in Finland, 50% in Portugal, 61% in Switzerland and a staggering – and slightly questionable – 92% in Ireland.
Buyouts’ share of market value last year increased to slightly more than 50% from 46% in 1996 (ecu 4.8 billion from ecu 3.2 billion), though the number of buyouts fell by 3%. The average size of buyout and buy-in deals increased to ecu 4 million from ecu 2.5 million in 1996, and accounted for a substantial proportion of growth in overall average investment sizes, which reached ecu 1.5 billion last year, an increase of nearly 30% from 1996.
Buyout investment by UK-based houses, at ecu 2.9 billion, accounted for 65% of total UK investment and 60% of total buyout disbursement in Europe in 1997, compared with 70% the year before. Investment in buyouts elsewhere in Europe grew by 117% to ecu 1.9 billion last year. Commenting on behalf of KPMG Corporate Finance, the EVCA survey’s sponsor, Mike Stevens said: “The buyout habit is fast catching on in Continental Europe. Corporate restructuring and an increasing focus on shareholder value are spawning a healthy flow of deals”. He predicted that the introduction of the euro next year would provide a further boost to the market by enabling institutions to invest across borders.
International private equity investors are also looking to diversify beyond their core markets of the US and UK, where competition for deals has become intense and bid prices stretched, Mike Stevens said, adding that “Continental Europe offers tremendous potential, both in terms of the availability of investments and their relative value”.
Buyouts accounted for ecu 476 million, or 36%, of total German disbursements during 1997, compared with 21% in 1996. In comparison with expansion capital’s 49% share of the German market, this proportion might still appear low until one remembers that German buyout investment increased more than threefold from 1996’s ecu 150 million over the year.
The rise in overall French disbursements was accompanied by an 8% decline in deal numbers and a concomitant increase in average investment size. This reflects a substantial resurgence in France’s buyout market, which accounted for 48%, or ecu 607 million, of French investment during 1997, compared with only 12% of the market by value in the preceding year. France was atypical in that it was the only principal European private equity market where investment levels exceeded total funds raised – albeit by a slender margin – during 1997.
As well as growth in new investment activity, the EVCA survey recorded significant growth in divestments (measured at cost of original investment) last year. During 1997, Europe’s venture capitalists divested investments with an original cost of ecu 5.8 billion, 63% greater than the 1996 total. This growth was driven in a large part by a rise in divestments via trade sale, which increased to ecu 2.8 billion at cost last year from ecu 1.7 billion in 1996.
Although the 391 IPO divestments in 1997, 391, was a slight decrease from the 416 recorded in the previous year, the value of investment at cost divested through this route rose 13% to ecu 872 million. Unsurprisingly, in view of the size and relative liquidity of its domestic public market, the UK led the field last year, divesting more than ecu 398 million of investments at cost (equivalent to 15% of total UK divestment) by this route. France ranked second, divesting ecu 219 million of investment from the cumulative portfolio via the public markets. This corresponds to 19% of France’s 1997 divestment at cost.
Although the absolute sums involved were substantially smaller, IPOs accounted for far higher proportions of divestments at cost in Switzerland (65%) and Sweden (23%). Germany, by contrast, divested less than ecu 20 million (2.5% of total divestments) through IPOs last year, relying on “other means”, which accounted for ecu 362 million (46.5%) of divestments at cost as its principal exit route.
The value of divestments by write-off also rose, to ecu 674 million compared with ecu 492 million in 1996, although write-offs as a percentage of the volume of divestments decreased from just over 24% to 18%. The value of write-offs as a proportion of total divestments at cost also declined slightly, down to 11.8% last year from 13.7% in 1996. Sweden and Finland fared relatively badly last year in terms of write-offs, which accounted for 21.5% and 23%, respectively, of divestments at cost in Sweden and Finland. By contrast, write-offs accounted for less than 1% of the value at cost of Italian divestments last year, compared with nearly 11% in the UK, 12% in France and 15% in Germany.
The remaining 25% of the amount divested was disposed of by other means, such as management buy-backs and redemption of preference shares.
The European private equity portfolio at cost was estimated to stand at ecu 32.8 billion net of divestment at the end of 1997. Since 1984, Europe’s private equity industry has invested over ecu 82 billion in more than 50,000 companies.
Fund Raising Patterns
The ecu 20 billion new capital raised in 1997 for unquoted investment in Europe represented a 151% increase from 1996’s record high of ecu 7.9 billion and more than four times the 1995 haul of ecu 4.4 billion. Furthermore, 1997-vintage funds account for a staggering 47% of Europe’s five-year fund-raising total.
Much of the phenomenal growth in European private equity funds raised last year was due to the bumper crop of pan-European buyout vehicles, or “mega-funds”, wrapped during the period. This pattern confirmed last year’s predictions that larger fund sizes were likely to accelerate the upward trend in non-European contributions to European private equity fund raising.
Mega-funds were the principal driver of the threefold increase in funds raised by UK firms in 1997, which rose to ecu 12.2 billion from ecu 3.7 billion the previous year. The sources of UK funds are examined in detail in Special Report (page 17). The UK was notable among the major European private equity markets for the level of funds raised from non-domestic sources – 11.7% of the total raised came from elsewhere in Europe and 47.2% from outside Europe. The UK scored the highest level of non-European capital of any European fund-market last year, but it should be remembered that a significant proportion of 1997 UK funds are slated for regional European, rather than principally domestic, investment.
Germany, the Continental market currently attracting most interest from international investors, saw even more spectacular growth in funds raised, which increased by 657% to ecu 2.6 billion from ecu 340 million in 1996.
Notwithstanding the ecu 1 billion raised for investment in Germany from foreign sources, domestic investors were the principal source of German private equity capital last year, providing 59.8% of funds raised.
Contrasting with the UK and Germany, fund-raising levels in France remained relatively static, increasing by a modest 2.5% to ecu 1.07 billion in 1997 from the previous year. The comparative insularity of the French private equity market is reflected by the fact that domestic institutions committed 86% of total funds raised last year.
The only three markets to record decreases in fund-raising levels during 1997 – the Netherlands, Switzerland and Norway – had all seen atypically high levels of funds raised during 1996. Increases in fund raising – albeit from low bases in some of the more spectacular instances – were recorded in all Europe’s other main markets.
Last year was the first time more than 50% of total funds raised in Europe were drawn from non-domestic sources. More than a third of the total came from sources outside Europe, underlining the increasingly international nature – and appeal – of the European private equity market.
Although pension funds and banks’ contributions to funds raised in 1997 – 26% and 25% of the total respectively – were in proportional terms broadly in line with their shares of both the 1996 and five-year fund-raising totals, the absolute amounts contributed by these categories of investor rose very substantially (Table 5). Pension funds’ contributions rose to nearly ecu 5 billion in 1997 from ecu 1.8 billion in 1996, while investment by banks grew to ecu 5.1 billion from ecu 2.3 billion.
Corporate investments increased eightfold from 1996 to almost ecu 2.6 billion, taking their share of the market to 11.3% from 3.5%.
Commitments from all categories of investors increased in absolute terms last year, although in most cases their proportional contribution to funds raised was broadly in line with their share of funds raised over the past five years.
It is interesting to note, however, that realised capital gains available for reinvestment, which accounted for ecu 1.37 billion of funds raised last year compared with ecu 1.26 billion in 1996, saw their share of the market fall to 6.9% from 15.8%, continuing the steady decline seen in their relative importance over the last five years.
EVCA chairman Falk Strascheg commented: “The dramatic increase in the amount of new money raised [in 1997], particularly from international sources, not only allows sufficient resources to meet continuing demand but also clearly demonstrates the attractiveness of the asset class among investors”.
Table 3: 1997 Fund raising and Investment
1997 funds % growth investment % growth
raised (ecu M) over 1996 (ecu M) over 1996
United Kingom 12,245 227.6% 4,428 48.9%
Germany 2,573 656.8 1,326 85.3
France 1,078 2.5 1,248 41.0
Italy 1,072 47.4 603 18.3
Sweden 984 1854.7 351 -16.4
Netherlands 859 -38.7 760 28.0
Spain 408 636.6 262 36.0
Finland 230 338.0 113 180.0
Belgium 190 2.8 179 64.6
Norway 77 -17.9 170 103.6
Switzerland 76 -51.7 55 -56.5
Austria 61 144.2 19 2116.9
Greece 56 132.3 16 -49.5
Portugal 52 43.4 63 84.5
Ireland 29 49.2 36 -4.1
Iceland 8 13.5 5 532.1
Denmark 2 156.0 22 -34.9
European Total 20,002 151.3 9,655 42.2
Table 5: Sources of New European
Private Equity Funds Raised
1997 amount % of 1997 five-year
(ecu M) total total
Corporate investors 2,257,718 11.3% 8.5%
Private individuals 802,497 4.0 4.3
Government agencies 446,133 2.2 2.8
Banks 5,151,041 25.8 27.2
Pension funds 4,994,742 25.0 23.2
Insurance companies 3,290,051 16.4 13.7
Academic instituions 145,882 0.7 0.8
Others 1,543,152 7.7 6.9
Realised capital gains available
for reinvestment 1,370,293 6.9 12.5
TOTAL 20,001,510 100.0 100.0