MOOD SWINGS

At the ninth annual European Technology Investment Conference in Barcelona in October, most of the general partners in the audience seemed in agreement that Europe's venture capital industry was on the way back. Yes, mistakes had been made in the past, but lessons had been learnt as well. Time for a steady but sustained recovery in both confidence and, ultimately, performance.

But then up to the stage strode a panel of limited partners to express a different view. “We can only judge European venture capital on its historic returns, and it hasn't yet done enough to justify being seen as a significant area for investment”, asserted Sandra Robertson, head of alternative assets at the London-based Wellcome Trust. Was it at that point that the mood changed? Or was it when she delivered this statement: “We are long-term investors, not long-term idealists”.

To an outside observer, it would have been easy to sympathise with Robertson's sentiments. More than one speaker had taken to the podium and proclaimed how European venture was now in its finest fettle since before the “bubble”. In other words, if you drew a timeline excluding the period leading up to the technology crash, you'd paint a picture of an industry making seamless progress. Limited partners, whose faith has been tested to the limit by spiralling losses, may perhaps be forgiven for finding this period rather hard to forget.

It should be said that listening to the LP panel was not an entirely painful experience for the assembled GPs. Hanneke Smits, head of European and Asian investments at Adams Street Partners, said she was encouraged by the operational experience of what she saw as a new generation of European venture capitalists, who were more likely to have been blooded in established venture capital firms or corporate venturing arms rather than in banks or consultancies.

Robertson, despite her earlier put-down, expressed the view that “survivors [of the downturn] have some interesting companies in their portfolios”. Clint Harris, a managing partner at Grove Street Advisors, stressed the importance of “looking at the road in front of you rather than just in the rear view mirror” while adding that GPs nonetheless had a tough job on their hands to coax money out of what was now “a smaller universe of institutional investors [prepared to invest in European venture capital] than before”.

The dilemma confronting the institutional investment community is whether to base their allocation to European venture on knowledge about past performance or on gut instinct about future prospects. Rather like a struggling football club with a new coach and fresh tactics, the sector pleads that it deserves one more chance to turn things round. It had better hope its backers come round to the same view.

THE UK'S BEST PERFORMING VENTURE CAPITAL TRUSTS

VCT MANAGER YEAR IRR
LAUNCHED
1 Foresight Technology VCT VCF Partners 1997 23.2%
2 Electra Kingsway VCT Electra Partners 2002 8.6%
3 Close Brothers VCT (Ord shares) Close Investments 1996 8.4%
4 Close Brothers VCT ('C shares) Close Investments 1997 8.0%
5 Oxford Technology 3 VCT Oxford Technology 2002 6.9%
6 Close Brothers AIM VCT Close Investments 1998 6.2%
7 Pennine AIM VCT Rathbones Investment 1996 6.1%
8 ProVen Media VCT Beringea 2001 5.4%
9 Enterprise VCT ('A shares) Noble Fund Managers 1998 5.0%
10 Baronsmead VCT 2 Isis Equity Partners 1998 4.9%

ALLIANZ TAKES BULLISH VIEW ON PRIVATE EQUITY
Germany's largest limited partner, which for the first time has agreed to manage third party capital, has announced plans to invest more in private equity going forward. Allianz currently has €3.4 billion ($4.3 billion) invested in private equity, just under 1 percent of the group's €350 billion in assets. CFO Paul Achleitner said that this figure was likely to increase over the coming years, while Allianz's exposure to quoted equity was expected to diminish. Allianz Private Equity Partners (APEP), its private equity fund investment arm which manages €2 billion, has for the first time accepted a mandate to invest in the asset class on behalf of a third party. Additional mandates are to be added over time, the group said. APEP was set up in 1996 and has since then invested in approximately 80 funds. Last year the unit deployed €261 million according to APEP's Munich-based CEO Wanching Ang and has a target of €330 million this year.

PANTHEON BUYS SWISS LIFE PORTFOLIO
Swiss Life, the Zurich-headquartered life insurance business, has sold a CHF400 million (€258 million; $320 million) private equity portfolio to Pantheon Ventures, the UK-based fund of funds group. The deal also includes outstanding commitments to the portfolio of a further CHF300 million. Swiss Life said the transfer of the assets, mainly funds of funds investments, would commence during the fourth quarter of 2004 and the final financial impact of the sale would be known in the first quarter of 2005. Following the sale, Swiss Life's private equity portfolio will comprise CHF114 million worth of assets, plus outstanding commitments of CHF59 million. Pantheon said the transaction involved over 40 geographically diversified private equity funds and a small number of direct investments. Approximately 50 percent of the portfolio is focused on the US, 40 percent on Europe and the bulk of the remaining ten percent on Asia.

CASH BACK TO SOVEREIGN LPS
Sovereign Capital, the UK midmarket private equity provider, has recapitalised two portfolio investments, enabling it to return capital to limited partners in Sovereign Capital Limited Partnership I, a £120 million (€174 million; $214 million) private equity fund closed in April 2002. Sovereign was able to distribute the cash after refinancing portfolio companies C.H.O.I.C.E., a residential healthcare provider first backed in February 2002, and SEAND, a special needs school operator that received funding in March 2003. Sovereign invested approximately £18 million of equity capital in the two businesses. Both investments have been fully repaid, generating an IRR of 77 percent. Sovereign Capital Limited Partnership I is currently just under 70 percent invested in a portfolio of assets that is on average 12 months old. The London-based firm currently manages £175 million on behalf of 20 institutional investors.

PARK SQUARE OPENS FOR BUSINESS
Park Square Capital Partners, a new €1 billion ($1.2 billion) ([A-z]+)-based mezzanine fund, has been launched by former Goldman Sachs mezzanine specialist Robin Doumar. The sponsoring investors are Ontario Teachers Pension Plan and Caisse de Depot et Placement du Quebec, which have committed C$1.2 billion (US$953 million; €776 million) to launch the fund. Partners Group, the Swiss alternative asset manager, is also an investor in the fund. Park Square's team also comprises David Cottram, former head of international equity capital markets at BNP Paribas, and Michael Small, previously a director of Dresdner Kleinwort Wasserstein's debt principal finance and securitisation group. Park Square said its strategy would be to invest in a full spectrum of subordinated capital tranches of European leveraged transactions for selected clients, including private equity firms, corporations and underwriting banks. For more detail, see also page 10.