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Time to commit

Data from the European Investment Fund's portfolio lend further credence to the idea that things are looking up for European venture.

There was an eye-catching stat hidden away in yesterday's news about the New Jersey Investment Division committing $200 million to the fourth buyout fund raised by Onex Partners. The GP commitment – so that's the manager, not the parent corporation – will apparently be somewhere between two and eight percent. Since Fund IV has a hard cap of $5 billion, that means the investment team could theoretically end up chipping in $400 million of their own money. That's a huge amount of personal wealth at stake.

Onex is clearly making a point of this when it talks to investors; wearing it as a badge of honour, even. And no wonder, because most LPs love a big GP commitment: they believe that having more skin in the game helps to sharpen focus and align interests. (Of course some argue that too big a GP commit makes a manager too risk-averse, less willing to 'swing for the fences’. But that's an argument for another day.)

The size of the GP commitment tends to be a particularly positive indicator for venture funds, according to Matthias Ummenhofer, who heads up the venture fund of funds arm of the European Investment Fund. (This division – which is largely funded by the European Central Bank but also has a small number of private shareholders – has committed more than €4 billion to over 270 VC funds since inception.)

It's no secret that the performance of venture in Europe was pretty dire for the decade after the dotcom bubble burst (EVCA's own figures show that between 2001 and 2011, European VC funds delivered an average net IRR of -0.94 percent). In the absence of performance fees, too many groups became too reliant on management fees. So today, a hefty GP commitment is a good indicator that managers are serious about performance and confident in their strategy.

In which case, it's presumably good news that GP commitments to VC funds have been creeping up across the board. In a speech at this week's Entrepreneur Country Forum in London, Ummenhofer reported that the average across the EIF's portfolio had inched up to 4 percent, with some funds going as high as 8 percent (as per Onex). Talking to PEI on the sidelines later, he said that some managers are even showing potential investors exactly how much of their net worth they're committing to their fund, as a demonstration of just how much skin they have in the game.

This increase in GP commitments also speaks to a broader point about the improving health of European venture. One reason why this is possible is because there are more successful entrepreneurs around who have made money via successful exits and are now looking to back other entrepreneurs (Skype founder Niklas Zennström at Atomico being one obvious example). There was much talk at the Forum (as ever) about whether European venture is still lagging behind the US. According to Ummenhofer, that's not necessarily the case, at least in the upper decile. But either way, the emergence of more successful exit case studies, more repeat entrepreneurs, more experienced GPs and more money in the ecosystem should narrow the gap still further in the next few years.

As a consequence of all this – and the efforts of publicly-backed groups like the EIF to seed the market – it sounds as though the sector is starting to become more attractive to private investors. The EIF's portfolio isn't necessarily a representative sample, since it will sometimes back funds for policy reasons that might not make sense from a purely commercial point of view. Nonetheless, Ummenhofer says that the proportion of money from private sources in its portfolio of funds has gone up in the last couple of years, so it's now at more than 60 percent. This has largely been due to interest from family offices, high-net worths and corporates; institutions are showing more interest, he says, but they might need more concrete evidence of returns before they commit more substantially.

Still, these data points do tell the story of a segment that (on paper at least) is starting to look pretty healthy again – at least in theory. Now it just has to show it can deliver the results in practice.