Resilient private equity

Total European private equity investment dropped significantly last year, but plenty of capital was gravitating to growth and venture capital, writes Andy Thomson.

With the boom years already seeming like a distant memory, surely today’s release of 2008 activity levels in European private equity by the EVCA would bring further opportunity for gloomy reflection on the demise of a once-thriving asset class. Not a bit of it. Yes, the headline figure shows that total investment across the region fell by 28 percent (to €54 billion) in 2008. Look beyond that, and the figures offer plenty of consolation.

For one thing – make sure you’re sitting down at this point – 2008 was, viewed objectively, a boom year. Take the 2006-07 bubble out of the equation, and 2008 would be the most prolific year ever for the European private equity industry. Looked at another way, the amount invested in the three years between 2006-8 was equal to the amount invested during the prior seven years.

So why did 2008 not represent a more dramatic decline, given that the number and value of large and mega-deals dropped by around 40 percent? One reason was the relative increase in private equity investment in buyouts given the lack of debt finance. According to the EVCA, the average amount of equity in mega-deals completed between 2006 and 2007 was 20 percent of the total financing – last year, the equity portion climbed to 32 percent.

Furthermore – as was widely predicted in many quarters – 2008 saw a revival in growth finance. Growth deals more than doubled in size during the year to more than €7 billion as debt-starved buyout firms increasingly entered the space. This was good news for small and medium-sized enterprises, which accounted for 20 percent of private equity investment last year compared with less than 12 percent in 2007.

It was also a good year for Europe’s much-maligned venture capital market: early-stage deals increased by 15 percent in number, while seed-stage and start-up companies received seven percent more funding in value terms than the previous year.                

Fundraising levels also remained surprisingly buoyant, with European private equity firms raising €79 billion in fresh capital during 2008 – just €2 billion down on the amount collected in 2007. One nuance here was the increasing attractiveness of Europe to non-European LPs, which accounted for 45.5 percent of funds raised compared with a five-year average of 37.6 percent. The contribution from European LPs was 30.4 percent, compared with a 40.1 percent five-year average.

It would be surprising indeed to claim the latest figures as an unadulterated good news story. A 28 percent fall is, after all, the headline. And there’s plenty to feel less than positive about if you want to look for it. Not least, the report highlights the rather dramatic decline in exits – in 2008, the value of exits was half that recorded in 2007 and was close to the level last seen in 2003. Plus, following robust second and third quarters, the fourth quarter delivered the year’s worst numbers. The figures for the first half of 2009 are unlikely to look too pretty.

Nonetheless, it’s worth bearing in mind that vintages should never be pre-judged until you have the evidence in front of your eyes. To some, 2008 was the year in which private equity’s world collapsed. In Europe at least, the numbers suggest it was still in pretty decent shape.