The global private equity industry will suffer a tough economic environment over the next 12 to 18 months and firms that are in the process of fundraising and exit opportunities are likely to be hit hardest. Imminent concerns centre on the economic environment’s direct effect on investor confidence says a statement issued by the National Venture Capital Association (NVCA) in the US.
VC’s expect to see a slower pace of new investments in the short term, as investors await the effects of the impact that the attacks will have on the already slowing economy. Prior to the attack, venture capital investment in the US for first half of 2001 reached $18.6 billion, 65 per cent less than the $52.4 billion figure for the same period last year. Despite this decrease, 2001 is predicted to be the third biggest year in US venture capital history, according to 3i/PricewaterhouseCoopers’ Global Private Equity Report.
Exit options are a cause for concern as the re-opening of the IPO market and the resurgence of the acquisitions market are likely to be delayed further, says the NVCA. As a result, VC’s will be faced with supporting their portfolio companies longer than first expected. On the positive side, an “overhang” of venture capital funds still exists, estimated at approximately $45 billion in the second half of the year. A large percentage of these funds will serve as reserves for existing portfolio companies.
In Europe, the disaster is most likely to affect those players who are in the process of fundraising. John Mackie, chief executive of the British Venture Capital Association, says fundraising stateside will inevitably be a struggle, but adds that the US market has been tough this year for fundraising anyway. “For those who are in the process of fundraising and who are targeting the US market, it is going to be even more difficult in the short term,” he said.
On the other hand, he says European players are becoming less reliant on the US as a source of capital for their funds. “What we have seen this year is that UK and European pension funds have been increasing their allocation to private equity funds substantially.” He adds that commitments from European pension funds to private equity have increased around three-fold in the past year.
HgCapital is currently raising for its fourth fund and with 85 per cent of commitments, is well on its way to reaching its target subscription of GBP730 million. The fund is also targeting US institutions, but so far has not encountered any problems attracting funding, says Craig Donaldson of the firm. “We have not had fall-outs from any anticipated funds coming into our next closing, but that could change. It is a tough market, exacerbated by the terrible events of the past few weeks.”
The EVCA was reluctant to comment on how the disaster might affect European investment, stating that it was still a sensitive issue. “For those who have the money to spend there is actually a tremendous buying opportunity, which is largely the effect of a reduction of quoted stocks,” says John Mackie.
Managing director of Candover, Colin Buffin said: “The events of the 11th have certainly slowed decision-making down, but in the long term investors realise that private equity has a five-year life span and is still considered a good home for investments.”