European exit market improving

European private equity houses are anticipating a re-opening of the IPO market next year, but do not anticipate a significant general recovery until 2005 according to a new survey.

The European Venture Capital and Private Equity Association’s (EVCA) Barometer survey has found private equity firms predicting an increase in both trade sales and flotations in 2004.

The survey reveals that sales by European private equity firms to trade buyers increased 30 per cent in the third quarter of 2003 compared to the previous quarter, and were at their highest level so far this year. However, the third quarter total is only just over half that recorded in the second quarter of 2002.

Signs emerged of a recovery in the IPO market, with a number of realisations by this route in the third quarter following two successive quarters of no divestments by IPO at all. This is a trend that appears to have continued into the fourth quarter of 2003. From the beginning of the quarter until December 15, 31 European IPOs with total proceeds of E1.2bn took place.

Of the top ten European IPOs this year, seven were listed in the UK. Top of the list was the E1.8bn IPO of Yell in July, followed by the E958m IPO of Bank Austria Creditanstalt in the same month. The survey found respondents to be positive in their expectations for exit possibilities in 2004.

The exit environment was tough throughout much of 2003, with secondary buyouts and recapitalisations frequently used as alternatives to more traditional forms of exit. The slower rate of exits was reported to have had a negative impact on firms’ ability to finance new investments and also to raise fresh funding from limited partners.

Some respondents claimed a stronger operational focus on their portfolio, which meant less time for investing in new deals but also created the requirement for hiring more personnel. Management companies reported closer monitoring of exit possibilities and a change in portfolio companies’ strategies to prepare for divestment.