It sometimes pays to be old fashioned

Joel Bainerman says Europe has done well to avoid some of the venture capital excesses that are now haunting investors in America.

In a recent editorial, we lamented European investors' relative backwardness when it came to investing in private equity and suggested – not for the first time – that the continent's buy side are still far behind their peers in the US when it comes to getting the most out of the asset class (See More is not enough).

We still think that's right. However Israeli technology writer Joel Bainermann reminded us that Europe's taking a different approach to private equity is not just all bad. “Don't believe that the US must be the standard Europe must measure up to. European investors are more conservative and that's good”, he chided us. Good point, we thought, and decided to publish his letter in full.


You are bothered by Europe perhaps lagging behind the US when it comes to the percentage asset allocation institutional investors are making to private equity. Yet it sounds like the trend is towards education to non-private equity investors to learn about private equity is going in the positive direction.

Don't believe that the US must be the standard Europe must measure up to. Things move slower in Europe than the US but they stay around longer. They tend to be more authentic in Europe.

My view is that Europe has much to be proud of in lagging behind the “venture capital” end of private equity that took place in the US. European investors are more conservative and that's good.

Until very recently Europe was immune to the “Nasdaq style IPOs” that VC funds deal with. All the other funds and areas of private equity got relegated to “not as sexy as high tech funds”. Well today we see what was behind all that “high tech bluff” that is fed to us day in and day out by every media outlet in the world.

For my part Europe (like Israel) should not take its orders from “Nasdaq/Wall St/US venture capitalists” and instead drop these notions of taking companies with no profits public based on something known as “future potential”. The fact is so few companies make it in high tech (think of even ten the size of Microsoft and Cisco?) and net profits are rare and simply are not of importance. Who created these new rules for companies to follow?

Europe, like Israel, ought to concentrate its technology-based industries on more mature companies that have done what it takes to build something real- not some hot-air about a “revolutionary new technology” that never turns into dollars and cents. That means more private equity in non-venture capital funds and less of a focus on Nasdaq or taking unprofitable companies public at very high valuations. From this perspective European countries should encourage laws which has European companies focused on building long term enterprises rather than go public too quickly based on hype and fluff. The fact is 85% of all IPOs on Nasdaq trade below issue price after 18 months. Forget about sales or net profits, just considering the value of the stock the public investors purchase 85% are losers. That can't happen in mid-market companies that take the public's money.

From this perspective it is much better for European private investors to buy into companies that have a track record rather than these unproven start ups. That end of the private equity market is one Europe can get along just fine without.

Joel Bainerman