The volume of money raised by European private equity funds continues to grow. Much of that money is flowing in the belief that continental Europe is close to developing the sort of buy-out and start-up culture which has long produced spectacular returns for venture capitalists in the US. In late March Apax Partners closed a €1.8 billion ($1.9 billion) pan-European fund. It has the distinction of being the largest private equity fund for Europe denominated in the new currency, but it joins an already large pool of funds, much of it denominated in dollars, which is dedicated for investment in private European companies.
Increasingly, venture capitalists are positioning themselves as specialists in a certain type of company or industry sector rather than as country specialists. "The days when investors would put their money exclusively in the UK or France are gone," says Clive Sherling, director of Apax Partners and chairman of the UK venture capital association. "We wanted to raise a fund which would invest across Europe and the most appropriate currency for that is the euro."
A lot of the appetite for European private equity investment comes from US institutional investors. Some 60% of the new Apax fund, for example, was raised from US investors (UK buyers accounted for 10% and the rest came from continental Europe).
Though the introduction of the euro may have sharpened US fund managers' focus on the continent, Gerry Montanus, general partner of Atlas Venture, points out that US interest has been growing for several years. "In the past some US investors saw US and European private equity as quite separate asset classes," he says. "But now large US institutional investors are more open to the idea of global funds and they are excited about European investment opportunities."
Atlas, which has its origins in the Netherlands, is another firm which has just added to the volume of European private-equity money. It closed a $400 million global fund in February. Montanus predicts that half the money will be invested in European companies and half in the US.
The volume of European private-equity money raised is unprecedented. According to the European Venture Capital Association, Europe's private equity firms had outstanding funds in 1996 of a little under €59 billion. By 1997, the last year for which data is available, the figure had risen to almost €83 billion. The amount of new funds raised in 1997 was €20 billion, more than double the figure for 1996. Market participants believe a similar amount was raised in 1998.
But those figures include country-specific funds, particularly for investment in Europe's most established venture-capital market - the UK. The increase in funds dedicated to Europe-wide opportunities may be even greater.
A number of high-profile funds have been launched in the last 12 months. Last year saw the closing of CVC Capital Partners' $3.1 billion pan-European fund, the largest raised to date, and Carlyle Europe Partners' e1 billion fund. This year, in addition to the Apax fund, Kohlberg Kravis Roberts (KKR) and Morgan Grenfell Private Equity are marketing large European funds. Morgan Grenfell Private Equity plans to close its fund, Deutsche European Partners IV, later this year and has a target of €1.5 billion. KKR plans to raise between $2 billion and $3 billion for its fund. Another US firm which is working to increase its profile in Europe, Hicks Muse Tate & Furst, this year closed a $4.1 billion fund. This recent activity adds to the growing number of outstanding European funds in excess of $1 billion, such as those from BC Partners, CinVen and Doughty Hanson.
What is attracting most of this money is the growing trend for corporate restructuring in Europe, particularly the tendency of the biggest companies to spin-off non-core businesses. Some of those companies are sold to trade buyers, but a good many of them have been sold to managers in leveraged buy-outs. According to Initiative Europe, a private equity research company, the value of buy-outs completed in continental Europe in both 1997 and 1998 was some €15 billion, more than double the figure for 1996. France and Germany have each accounted for around 30% of that total for the past three years.
The growing number of big MBOs is pushing up the size of private equity deals. According to Patrick Cook, director of 3i, average deal size in continental Europe rose from $88 million in 1995 to $290 million in 1997.
At the moment there is more appetite for the big, prestigious deals than supply. But Cook, whose firm does not focus exclusively on buy-outs, points out that this situation could easily change. "There are many good firms which just focus on the big deals," he says. "And it is quite possible that the market will develop sufficiently to absorb all of the funding which has been raised for buy-outs. It would take only a few big deals to absorb a lot of that capacity."
But for now, there is a large pool of money with little to do but wait for the likes of Siemens to make its next spin-off.
Apax Partners is one of several firms that see themselves as more than just LBO specialists. "A large proportion of private equity money tends to be invested in buy-outs," says Sherling. "We feel that is the wrong strategy. Around 30% of our fund is for early-stage investments, particularly in technology. And that €600 million is the largest pool of money dedicated to early-stage investments in Europe."
Sherling points out that such investments are not necessarily small. "The typical size of our investments is €5 million to €10 million. At that level we don't see a lot of other venture capital firms. Our main source of competition is from corporate investors. We provide an alternative source of financing for, say, the biotechnology company which might otherwise have to sell out to a large pharmaceutical company."
Atlas Venture is one competitor in the early-stage sector. The firm focuses exclusively on the IT and life science industries and its recent fund will mostly be invested in early-stage companies and start-ups. It invests anything from $2 million to $10 million in the companies it buys into over the entire period of its involvement.