Invitation only

And so those fundraising firms currently competing for capital are desperate to be the among the fortunate few uttering the precious words – invitation-only.

They say every cloud has a silver lining, and the main benefactors of the fundraising downturn caused by the credit crunch look set to be the mid-market and venture end of the private equity spectrum. The pendulum was bound to swing back to them at some point, but the dark cloud of the credit crunch has merely acted as a catalyst for the inevitable.

It is the humble mid-market, overshadowed by its mega peers for at least the last five years, which looks set to be the benefactor of this rapid change in market sentiment. LPs, including the giant US state funds, are being forced to write smaller cheques. The days of the US$1bn commitment could be over for now, meaning tough times ahead for the likes of mega players CVC and Texas Pacific Group which are gearing up for their next fundraising.

This LP cloud certainly has a silver lining for European venture. Fund performance is improving steadily with the 2006 one-year average net IRR standing at 17.2%. And the expected allocation of funds raised for venture capital has more than tripled from €5.7bn in 2003 to €17.5bn in 2006.

The smart investors should now be digging deep and placing bets. But the European venture community is close-knit and a good venture team can only manage a certain amount of money. So for those jumping on the venture bandwagon, beware the herd mentality, which should set alarm bells ringing as a reminder of what happened in 2001 when there was too much money trying to cram into a small market and so a lot of wannabes got into being venture managers who shouldn’t have and consequently got burned.

Those sophisticated LPs looking at venture take their due diligence very seriously and will delve into a venture firm’s current working portfolio and even talk to the CEOs of individual companies. The herd-type LP, however, will rely on data rather than due diligence. But the venture window for investing is short and for these LPs by the time the numbers stack up, it may be too late to get into the top quartile funds.