Investors poured a record amount of capital into European private equity in 2006, encouraged by the strong performance of recent vintages.
The industry enjoyed its best fundraising year yet in Europe, according to new figures from the European Private Equity & Venture Capital Association, with a record €90 billion raised. This was a 25 percent increase on the previous record from 2005. Pension funds contributed about one quarter of this, while the proportion from funds-of-funds doubled to 21 percent of the total, or €18 billion in all.
The strong returns of the best-performing firms were a major driving force behind this increase, EVCA said. Over a 26 year period, upper quartile buyout funds delivered an internal rate of return of 37.6 percent, while upper quartile venture funds delivered an IRR of 23.5 percent.
EVCA believes the figures point to a “comeback” for venture capital investment, with the total raised for venture funds up €5 billion to €16 billion – the highest figure since 2000.
However, many European managers remain sceptical about the fundraising environment for venture firms compared to North America, suggesting that investors are yet to recognise the fact that the segment is able to generate above-market returns.
Loizaga also acknowledged the recent opposition to the private equity industry from unions, policy-makers and the media, suggesting that these performance statistics were the best response to opponents of the asset class. He said: “At a time when the global industry is under increased scrutiny, particularly in terms of the way in which private equity firms operate and in their ability to deliver to investors and other stakeholders, performance is and will remain a key indicator.”
Equity investment increased from €47 billion to €50.3 billion, with more than three quarters of this total spent on buyouts. However, the average deal size of the 8,500 investments completed last year was €17 million, showing that despite the greater preponderance of large buyouts, small to medium-sized companies remain the core focus of the industry in Europe.
Loizaga said EVCA would keep working to defend the industry, but called on other market participants to play their part: “We cannot do this alone,” he said. “We need vocal support from all segments of the industry, particularly from those who benefit from its strong performance.”