BVCA reports on private equity fundraising and investments in 2002

02 June 2003

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The BVCA reports that despite strong performance indices, pension fund allocations to UK private equity funds fell by more than half in 2002. However news also has emerged that the largest local government pension scheme in London, the Â£1.5bn London Pension Fund Authority, is move into private equity. UK private equity funds raised a total of Â£7.8bn last year, down 43% on the high of 2001, when Â£13.6bn was raised. Of the 2002 total, UK pension funds contributed Â£796m, down from Â£1.6bn in 2001. In an apparent endorsement of the asset class, however, it is reported that the London Pension Fund Authority is seeking a private equity manager to administer around of 5% its assets, to be valued at Â£50-70m. The fund currently has around Â£1.5m in venture capital.

The BVCA report finds that UK banks committed Â£1bn to the asset class in 2002, representing 14% of all funds raised, compared with 2001, when their investment represented five%. UK insurance companies also increased their allocation to the industry, investing Â£739m in the UK private equity industry in 2002, up 64% on the previous year. A total of Â£361m was returned to investors during the year, equating to just under five per cent of the overall total. Funds of funds accounted for 14 per cent of all funds raised.

The BVCA stated that UK private equity outperformed UK pension funds and all FTSE indices over one, three, five and ten-year periods. In 2002, UK private equity achieved a net return of 1.4%, a superior performance compared to both UK pension funds and the FTSE All-Share Index, which returned -13.9% and -22.7% respectively.

Mean returns to private equity were 4.2% per year over the past three years, and 11.4% over five years, and 16.2% over ten years. It is also indicated that there is a certain variability in fund performance, however. Referring to asset value, early-stage funds fell by a quarter in 2002, and showed a loss of 5.9% per year over ten years.

The BVCA's John Mackie attributes the general fall in private equity fundraising to uncertainty in asset markets generally. On the investments side there was more positive news: investments made by private equity funds were reported down just 11%, from Â£6.2bn to Â£5.5bn in 2002. Worst hit were technology investments, down from Â£1.7bn to Â£500m. The value of early-stage and expansion investments suffered the greatest proportional decrease. Early-stage investments fell from Â£227m to Â£196m, and expansion financings from Â£1.4bn to Â£1.1bn. Nevertheless, over half the UK companies backed were in the expansion stage category: 568 such companies were backed, down from 590 in 2001. While the value of investment in UK early-stage companies fell, the number of such investments rose, from 218 to 233 in 2002.

The amount invested in management buyouts rose by 6%, while the number of companies backed fell, from 202 to 150 companies. The average MBO financing was Â£17.7m. The number of management buy-ins decreased by 34%. The total amount divested fell by 3% to Â£2.6bn, with trade sales accounting for 31% of the overall amount divested at Â£791m. Despite the disappearance of the IPO market, divestment by flotation accounted for 20% (Â£571m) of the overall total, largely the result of CVC and Cinven's listing of bookmaker William Hill. Write-offs accounted for Â£628m.