European mid-market fundraising to remain subdued in 2013(2)

European fundraising failed to gather pace in 2012, according to a recent study by Acanthus Advisers.

The placement firm said total funds garnered by the region’s GPs posted a slight decrease last year, from €13.2 billion to €14.7 billion in 2011, remaining far off the €24 billion peak observed in 2007.

This led volumes raised in European private equity over the last four years to only represent 40 percent of the amount raised in the previous four years (2005-2008). The same pattern applied when focusing solely on the mid-market, although the decline appeared to be less stark at 58 percent.

Acanthus provided a number of reasons for such a prolonged contraction. At the industry level, it said, mounting pressures on the region’s fund of funds – which count among the major backers of mid-market firms – have led to a marked slowdown in new allocations.

New solvency regulation was also deemed responsible for the reduction in capital flows. By driving banks and insurers away from the asset class, the study said, they’ve created a large number of opportunities in the secondary market – ultimately leaving less cash available for primaries.

Competition for capital from other regions was also deemed strong, with more attractive prospects in emerging markets and the US leading many European investors to reallocate resources away from the continent.

But the single biggest hurdle to a recovery in the fundraising market, according to the study, was the low level of realisations observed over the last decade. With only 23 percent of all capital committed between 2006 and 2008 returned as cash to investors, it said, LPs continue to be restricted as to future allocations they can make to the asset class.

Deployment also remained slow, with total overhang from funds raised in 2004-2012 still standing at €110 billion.

A silver lining lied in the dynamism displayed by countries outside of the region’s core, whose attractive economic fundamentals and maturing private equity industry provided a strong investment rationale for LPs looking to diversify their portfolio. Emerging Europe, which comprises Central and Eastern Europe, Turkey and Russia, garnered €3.7 billion in commitments last year – the largest amount raised since 2007.

This was largely driven by Turkey, the study noted, with large funds closed by both of the country’s leading firms last year.