Earlier this year, the British Private Equity and Venture Capital Association published a report, written by two academics at the London School of Economics, which purported to bust a few myths about the European venture capital industry – particularly in terms of its perceived disadvantages to US venture. The headline finding was that if you control for entrepreneur experience, VC-backed businesses were no less likely to succeed in Europe than in the US – at least in terms of finding exits.
But there was also a chart buried away towards the back of the report that had some interesting implications for the venture secondaries market in Europe. Based on data from Dow Jones VentureSource, the chart plots the cumulative total of exits (including both IPOs and trade sales) for venture-backed businesses in the US and Europe. In amongst the statistical wonkery, what it basically shows is that in Europe, the volume of exits starts slowing noticeably about 100 months (eight years or so) after a first VC investment, has almost flattened out by 150 months (12.5 years) and has completely ground to a halt – at about 40 percent of VC-backed companies – by 200 months (16.5 years).
Since a typical limited partnership fund has a ten-year life, with possibly a couple of years of fund extensions on top of that, this might not seem very significant. However, according to Roland Dennert, a Munich-based managing partner at
LPs believe that one day the companies in these portfolios are going to be sold. But the data shows that’s not going to be the case: if a company is not exited 10-12 years after its funding, the chances are that it probably won’t be.
Roland Dennert, managing partner, Cipio Partners
direct secondaries specialist Cipio Partners, there are a lot of funds raised between 1996 and 2000 (so they’re now 13-17 years old) that are still around and haven’t been liquidated – because there hasn’t been the pressure from LPs. “LPs believe that one day the companies in these portfolios are going to be sold. But the data shows that’s not going to be the case: if a company is not exited 10-12 years after its funding, the chances are that it probably won’t be.”
The financial crisis has exacerbated this issue, he suggests. Because it’s become much harder to find attractive exits, typical VC holding periods have extended substantially (from 3.2 years in 2002 to 6.4 years in 2012, according to Cipio’s own analysis of the VentureSource data).
What this means, he argues, is that LPs need to start pushing harder for funds to be liquidated at the end of their statutory life (i.e. 10-12 years) – because statistically, there’s unlikely to be much good news from the portfolio thereafter.
All of which ought to bode well for direct secondaries firms, who can theoretically offer these existing LPs a better chance of realising some value from a superannuated portfolio. Earlier this year, Nordic specialist Verdane Capital Partners bought a portfolio of four assets from Danish group Nordic Venture Partners. Other venture firms are also considering this sort of portfolio sale, sources say, including Amundi and BayTech Venture Capital.
Nonetheless, there remains a significant barrier to progress: the willingness of European VCs to bite the bullet (despite the fact that they can typically create more value with new deals). “If we talk to LPs, they’re very much in favour,” says Dennert. “But GPs are often reluctant because they see some stigma attached to doing secondary deals – it’s like they’re giving up on it and saying they couldn’t do it themselves. New deals are happening all the time, so progressively it’s getting there – but very slowly.”