One rule for buyouts, another for venture

Ernie Richardson, UK tech veteran, is disappointed investors are not consistent when assessing relative investment opportunities in private equity.

MTI chief

Another European city, another private equity conference and another hand-wringing panel on the future of European venture. If it carries on like this we will need to have counsellors from The Samaritans on hand to support venture GPs emerging from such panel sessions!

Major European institutional fund managers have now developed a mantra on European Venture that runs something like – 2000 vintage, Dotcom bust, dreadful returns, where are the home runs? All of which serves to provide confirmation of the received wisdom that the European venture model is broken.

Meanwhile, and mostly unnoticed, actual venture investors have carried on making investments where they can and are producing returns which should see the vintages since 2003 on a par with the best of venture vintages.

However, in among all the sackcloth and ashes there was one intriguing little data point. A survey produced by Almeida Capital described attitudes of LPs towards different asset classes within private equity.

As you would expect, top of the list is small to medium buy-out funds and US venture ranks a promising number five. By contrast European venture was ranked 8 out of 12 just above property and secondaries.

Large buy-outs were at number seven. Now just pause for a minute, polish your glasses and read that again. European venture sits just below large buy-outs in terms of its attractiveness to LPs.

Clearly I applaud this analysis. I am delighted to see LPs taking a rational forward look at the prospects for the large buy-out sector and coming to the not unreasonable conclusion that the next few years could be tough for that sector.

What saddens me is not the prospects for large buy-out. This is not an exercise in shadenfruede and personally I don’t subscribe to the view that venture will only get better when buy-outs fail.

No, what disappoints me is that the same forward looking analysis is not being applied to venture. The market conditions that have made European venture an attractive proposition since 2003 still persist.

We have under-priced many things: deals, certainly in comparison with the US; major economic factors that play to innovation such as energy, environmental, health care; capital rationing that is always a driver towards efficiency and finally much more experienced management teams in GPs and in their portfolio companies.

Venture deserves, and has earned another look from institutions. The Dotcom debacle is at least one generation of managers old and the survivor GPs are experienced, chastened and hungry for success. In addition, and most critically, they have owned up to what went wrong between 1999 and 2002 and put it right.

The venture sector is awash in promising opportunities at valuations that West Coast US VCs would kill for. In addition, European GPs now have talented and experienced teams many of whom have returned from West Coast US venture backed deals with cash and experience to deploy.

What these GPs need is capital and on capital on a scale which would allow them to establish and then (most critically) stay with deals in order to generate more home runs. This is not special pleading and it is not a search for philanthropy, rather it is a request that LPs apply the same rules to venture that they are clearly applying to other private equity asset classes.