Longer term gets revalued

Ultra high end investors have managed to hold on – not so the less well off, writes Brian Spoors.

Europe’s high net worth private equity investors may need a few more months to lick their wounds following the savaging their capital took when the dotcom bonanza turned on them two years ago. But already some industry insiders see signs of a return to health amid the pain. Not that every potential business angel has been scared off completely – the ultra-high end is still involved in private equity. But activity among the less well off has fallen. “We have seen the emergence of extremely high net worth individuals (HNWIs) and families still being involved where they need to invest for the longer term. But the middle range of investors has been depleted,” says Guy Eastman, European investment director at Schroder Ventures. Figures for 2000 and 2001 give mixed signals on how investors viewed the asset class. According to data from European Venture Capital Association (EVCA) for 2000-01, investors chose to put most of their money into the association’s “business expansion” category. This was a fair indication that appetite for high-risk start up investing had fallen – a caution that came even as UK pension funds doubled investment in private equity to E1.3bn. But it is understandable caution. Last year, the British Venture Capital Association (BVCA) reported Ł826m in write-offs during the fallout from decisions taken during the 1990s Internet boom. The UK private equity portfolio last year fell 7.1 per cent, the worst performance for five years. One alternative investment consultant said: “We are back to the 1992-93 experience for the big time investor, when you had to work hard and could not take a company public in eight months. A lot of investors have been weeded out, and a lot of funds that started in the late 1990s and have not returned capital.” According to Jeff Ganung, director of alternative investments at consultancy Watson Wyatt, a number of sophisticated investors – both individuals and institutions – believe this is the time to put in cash. Two years ago, they were adamant to the contrary. “Equity investors are licking their wounds because of falling valuations,” he says, but suggested there was some comfort in this pain. “Investors are returning to the understanding that the long-term play is not a year or two in private equity. It is more a seven to 10 year time horizon, and investors appreciate that more than they did two years ago. People are still looking for opportunities, although they have smaller public portfolios.” There are, according to Mr Ganung, two principal reasons why now might be a good time for private equity investors to take the plunge in Europe. “First the balance of power in company management is shifting to the investor. Second, lower valuations in the public markets mean we are seeing more reasonable valuations in the private sector. Stickiness by a business’s founders, in holding on to higher values, is slipping, to give opportunities for the private equity investor.” Mr Eastman launched the Dublin-registered Schroder Private Equity fund of funds in September with E172m and expects to have raised E240-250m by its close on June 14, just under its target of E250m-E300m. But the bulk of subscribers are institutions rather than individual investors. “Launching last September took us in at a period which has been difficult for high net worth individuals. They are having to re-assess their portfolios,” he says. A second fund of funds, so far unnamed, is planned, to be marketed to those investors for whom the current opportunity closed too soon. But Mr Eastman doesn’t see much sign that pots of money will be found flowing again into funds of funds, start ups and buy outs in the near future. “This is June and the view people are taking is very much the same as in January. Some people are taking a broader view in some countries and some people don’t have the cash any more, having used up their powder in the tech boom.”