Survey: European GPs face exit crisis

Realisations in the European private equity sector for 2003 were running almost two-thirds below anticipated levels, according to a report by KPMG’s private equity unit.

Research published by KPMG’s Private Equity Group shows that realisations in the European private equity sector for 2003 were running at under 40 percent of anticipated levels.

The report – Insights into Realising Value 2004 – includes the results of a survey of 100 European private equity executives as well as interviews with a sample of senior managers. The report said the relative lack of realisations for funds invested in the late 1990s has resulted in the build-up of a 'realisation overhang'.

The overhang is the result of a difficult exit market caused by the closure of the IPO markets, falling equity markets, the absence of trade buyers and a broader drop in confidence.

The level of exits has fallen so considerably that firms are faced with the challenge of achieving a dramatic increase in realisations in order to make up the shortfall. “Our analysis of the position suggests realisations in 2004 will have to treble in value compared to 2002 if the realisation overhang is not to increase,” said Oliver Tant, head of KPMG's Private Equity Group. “In this climate, the pressure is on private equity houses to be increasingly innovative in developing returns for their investors.”

One of the consequences of the reduction in exit opportunities has been the well-documented increase in secondary buyouts among private equity firms. In the survey this was the realisation route with the highest net increase in usage over the past three years. Also on the increase is refinancing of existing investments: on average, respondents to the survey said they were considering refinancing 20 percent of their current investments, compared with 12 percent three years ago.

Tant said the lack of exits could lead to the disappearance of some firms which fail to respond to the anticipated pick-up in activity this year. “With some of our respondents predicting consolidation in the sector, 2004 could prove to be a make or break year for some houses.”

“The pressure of the realisation overhang is creating a number of interesting effects,” said Tant. “For the public markets, there will be an opportunity to invest in high quality businesses coming out of private equity ownership. Investors in private equity funds will no doubt be monitoring realisation performance closely.”