snapshot of the private equity and venture capital industry

articol de Les Nemethy, NOIEMBRIE 04, 2011, 10:08 EET

The European Private Equity & Venture Capital Association (EVCA)(www.evca.eu) has recently published a special report providing an excellent statistical snapshot of the private equity and venture capital industry as of 2010. It provides a detailed breakdown on sources of capital raised, investment activity, investment per sector and per country, etc. While it is not possible to do justice to the entire report in a short article, I’d like to focus on some of the interesting statistics that came out of this report: Annual investment value peaked at EUR 2.5 billion in 2008, declining slightly to EUR 2.4 billion in 2009, falling to EUR 1.3 billion in 2010. Poland was by far the largest market in 2010, accounting for EUR 657 million of investment (44 transactions), more than 50% of the regional total in 2010. Only 3% of private equity funds raised in Europe were devoted to Central Europe in 2010. With the exception of 2009, in most years venture capital and private equity investment as a percentage of GDP was considerably less in Central Europe compared to Europe as a whole. For example, in 2010, it accounted for 0.119% of GDP compared to 0.314% of GDP in Europe. I interviewed two people for comments on the EVCA report: Robert Manz, Managing Partner and Member of the Board of Enterprise Investors, a private equity firm, and Chairman of the EVCA committee that produced the report, as well as Kai Koppen, Managing Partner for CEE for Riverside, a private equity firm. My questions addressed to both gentlemen pertained to the overall state of the private equity market in Central Europe. In this day and age when we talk about faster growth in Central Europe and convergence towards Europe, should there not be a higher private equity to GDP ratio in Central Europe compared to Europe? According to Kai Koeppen, the answer lies in risk management of institutional money. The UK has traditionally been the dominant market, with a 40% share of the European private equity market, where private equity firms have developed excellent relationships with managers of institutional money. The UK is followed by the Nordic markets and France. It will take time for Central European firms to develop track record and relationships with institutional funders, even though there might be more room for growth in Central Europe than in the UK. According to Robert Manz, private equity in Central and Eastern Europe still has tremendous room to develop. The private equity industry has only a 20 year history in the region; it is still less widely used and accepted in Central Europe compared to more developed private equity markets. In Central Europe there are fewer sizeable deals, the markets and countries are smaller, in short, markets are less developed. This includes the lack of readiness or preparation of companies to take in financial investments. There has been an “equity gap”, that is to say there has been more demand for equity capital than supply, and the equity gap is larger in Central Europe than in Western Europe. According to Mr. Manz, there is a healthy balance between demand and supply of equity capital, and that everything is going in the right direction: there has been a steady upward trend in the number of deals and the value of deals. (Deal flow has increased by a factor of five since 2003). With respect to obtaining leverage for private equity deals, banks were generally unwilling to lend in support of private equity deals until 2003. Bank lending increase nicely until the Lehman crash, where obtaining leverage for private equity deals became extremely difficult. It is now once again no problem for good deals to obtain debt financing. My own personal view as financial advisor is that many more companies would like to receive private equity financing than are able to obtain it, and the single largest reason for this shortfall is their own lack of preparation or suitability to receive private equity funding. This explains why private equity funds invest in only a very small percentage of the deals they examine.

While it is not possible to do justice to the entire report in a short article, I’d like to focus on some of the interesting statistics that came out of this report:

Annual investment value peaked at EUR 2.5 billion in 2008, declining slightly to EUR 2.4 billion in 2009, falling to EUR 1.3 billion in 2010.

Poland was by far the largest market in 2010, accounting for EUR 657 million of investment (44 transactions), more than 50% of the regional total in 2010.

Only 3% of private equity funds raised in Europe were devoted to Central Europe in 2010.

With the exception of 2009, in most years venture capital and private equity investment as a percentage of GDP was considerably less in Central Europe compared to Europe as a whole. For example, in 2010, it accounted for 0.119% of GDP compared to 0.314% of GDP in Europe.

I interviewed two people for comments on the EVCA report: Robert Manz, Managing Partner and Member of the Board of Enterprise Investors, a private equity firm, and Chairman of the EVCA committee that produced the report, as well as Kai Koppen, Managing Partner for CEE for Riverside, a private equity firm.

My questions addressed to both gentlemen pertained to the overall state of the private equity market in Central Europe. In this day and age when we talk about faster growth in Central Europe and convergence towards Europe, should there not be a higher private equity to GDP ratio in Central Europe compared to Europe?

According to Kai Koeppen, the answer lies in risk management of institutional money. The UK has traditionally been the dominant market, with a 40% share of the European private equity market, where private equity firms have developed excellent relationships with managers of institutional money. The UK is followed by the Nordic markets and France. It will take time for Central European firms to develop track record and relationships with institutional funders, even though there might be more room for growth in Central Europe than in the UK.

According to Robert Manz, private equity in Central and Eastern Europe still has tremendous room to develop. The private equity industry has only a 20 year history in the region; it is still less widely used and accepted in Central Europe compared to more developed private equity markets. In Central Europe there are fewer sizeable deals, the markets and countries are smaller, in short, markets are less developed. This includes the lack of readiness or preparation of companies to take in financial investments. There has been an “equity gap”, that is to say there has been more demand for equity capital than supply, and the equity gap is larger in Central Europe than in Western Europe.

According to Mr. Manz, there is a healthy balance between demand and supply of equity capital, and that everything is going in the right direction: there has been a steady upward trend in the number of deals and the value of deals. (Deal flow has increased by a factor of five since 2003).

With respect to obtaining leverage for private equity deals, banks were generally unwilling to lend in support of private equity deals until 2003. Bank lending increase nicely until the Lehman crash, where obtaining leverage for private equity deals became extremely difficult. It is now once again no problem for good deals to obtain debt financing.

My own personal view as financial advisor is that many more companies would like to receive private equity financing than are able to obtain it, and the single largest reason for this shortfall is their own lack of preparation or suitability to receive private equity funding. This explains why private equity funds invest in only a very small percentage of the deals they examine.

articol scris de Les Nemethy - CEO of Euro-Phoenix Financial Advisors Ltd. (www.europhoenix.com), a Central European corporate finance company focused on Mergers & Acquisitions