UK investment in private equity set to increase

A Dresdner Kleinwort Benson Research report says that UK investors still lag behind their US counterparts when it comes to investing in private equity but predicts this is set to change.

The report by Dresdner Kleinwort Benson Research on venture capital and private equity shows that increasing recognition for private equity should drive further demand for the asset class. Underlying market growth is set to continue, particularly in continental Europe. The report states that “European private equity markets are enjoying an unprecedented period of growth; over 200 funds have been set up in the last two years.”

“While the European private equity market has grown strongly over the last three years, we believe there is scope for further growth. Private equity investment as a percentage of GDP in Continental Europe remains low relative to more developed markets such as the UK and US. However, the trend is positive and we believe that key markets such as Germany, France, Spain and Italy will continue to move towards UK levels,” it says.

The report comments though that “UK investors continue to lack appetite for this evolving asset class. Over three-quarters of funds do not invest in private equity.” The report says that over the last ten years private equity funds have outperformed both the FTSE All Share and pension funds by over five per cent per annum but UK investors typically only invest around one per cent of assets in private equity, a fraction of that invested by their US counterparts.

The European private equity market continues to go from strength to strength both in terms of performance, funds raised and funds invested, it says. It cites a recent report by 3i Group and PWC which showed that global private equity investments rose by 65 per cent to $136bn in 1999. “For the first time in five years, investments have exceeded funds raised. Over the last five years, the North American and European private equity markets have grown at an annual compound rate of 40 per cent.”

The report also refers to recent EVCA data which shows that after two years (1997 and 1998), where capital raised exceeded funds invested by a considerable margin, 1999 saw E25.1bn invested and E25.4bn raised. The report makes the point though that this still leaves a surplus of E17.1bn to be invested.

The European private equity industry should continue to grow over the medium term. The report cites the 2000 International Investment Benchmarks Report conducted by Venture Economics and Bannock Consulting in conjunction with the EVCA. It shows that European private equity performance continues to improve. “The pooled IRR for all funds surveyed stood at 14.5 per cent at the end of 1999 against 11.9 per cent at the end of 1998. Choosing the right manager is essential, as the top quartile polled IRR at end 1999 stands at 34 per cent up from 24.4 per cent at end 1998.”

The attractions of private equity investing are given statistical support in the study: “Over the last three years, independent UK venture capital and private equity funds have achieved a net annualised return of 31.1 per cent. This compares favourably wht the gross returns of 20.4 per cent from the FTSE All Share and 19 5 per cent from UK equity portfolios of UK pension funds.”

The report also draws attention to the UK government's wish to see investment in private equity increase and references the forthcoming Myners Review of Institutional Investment and its likely recommendation to remove some of the obstacles that have existed to date. Last month, the review called for the removal of the Minimum Funding Requirement which has been a factor in restricting pension funds from investing in private equity funds.

The report quotes Prime Minister Tony Blair's speech at the BVCA’s Entrepeneurial Summit last year, when he said: “British pension funds invest around 1 per cent of their money in venture capital. In the US, it is nearer 5 per cent. I can’t make pension funds invest more in venture capital but I urge them to look at the issue, to examine whether they and other institutional investors are being too cautious when it comes to venture capital.”