Venture's Olympic performance

European venture has long been the ugly duckling of private equity. With poor average returns and high standard deviation between players, it is not hard to see why the asset ranks bottom of LPs' wish lists.

"It's been really hard to raise money for venture since 2006," says Fraser Van Rensburg of Asante Capital Group. "Ten years ago, LPs had dismissed the 1999/2000 vintage and subsequent downturn as a one-off blip and so continued to back GPs in the hopes the asset would return to the highs seen in the 1990s. Therefore GPs that closed funds before 2007 were relying on some very old track record, mostly pre-2000, since after 2007 fundraising for European VC became very hard."

The impact of waning institutional interest in the asset is stark: the Q2 Arle Barometer, produced by unquote", recorded just 31 deals for European venture, the lowest total since Q4 2005. The value represented a 68% fall from Q1 and, at just €104m, was the lowest sum put to work in early stage business since 1998.

But European venture may be turning a corner. Extraordinary exit momentum across Europe's wider private equity market is lifting venture with it (see graph above). Last year's €98bn exited by GPs across 483 deals was admirably close to the 2007 peak of €117bn across 662 exits. Venture is bouncing back since its 2008 trough, and now sees over 50 exits per year in Europe (see graph below).

 

Venture may be back on the map after a stellar 18 months.

 

 

 

 

 

 

 

 

 

These exits are not just about quantity, but also quality, with some of Europe's best-loved VCs sharing the limelight with lesser known players.

DN Capital is one of these. Its sale last year of Endeca to Oracle for $1.1bn retuned nearly two thirds of DN's first fund, or three quarters of total capital committed in dollars. DN isn't a one-trick pony, though: earlier this year, the GP sold Apsmart to Thomson Reuters in a deal that saw the vendor reap a reputed 20x money. And its sale last year of Datanomic generated a three-digit IRR. These are just three of the GP's seven exits in the last 18 months.

Life sciences and technology investor Advent Venture Partner has also had a phenomenal run. Last July, Advent sold Zong to eBay for $240m, giving Advent a 7.7x return and 61% IRR. That deal marked the end of a stellar year for the VC, which saw it sell The Foundry to Carlyle Group for a reported triple-digit IRR. Most recently the firm sold Avila, EUSA and Vitrue, all to trade buyers.

Earlier this year, Sofinnova sold BlueKiwi Atos SA Group. The exit came just weeks after Sofinnova floated DBV Technologies on NYSE Euronext Paris, though all the cash raised in the oversubscribed listing was re-injected into the business. The GP exited six businesses in 2010 and 2011, with notable disposals including Corevalve (9x), Stentys (4.7x) and Preglem (4.5x).

Last summer saw SEP and DFJ Esprit sell Zeus to Riverbed Technology for $140m, corresponding to 10x current year revenues. The vendors each reaped double-digit multiples for the deal, which they backed at different times. In the Nordics, tech investor Creandum sold Nanoradio to Samsung Electronics earlier this year.

We've seen the money
LPs are noticing the consistent homeruns, with commitments supporting a handful of impressive fund closes this year. Advent's impressive run saw LPs add a third to Advent's 2010 £75m fund, bringing it to £101m. The additional capital was raised from one new LP – whose interest catalysed the re-opening of the vehicle – as well as commitment increases from existing investors. The increase is notable in that it was Advent's first dedicated life sciences fund, and originally took 15 months to raise in what the GP described as a ‘challenging' environment.

This summer Index Ventures closed its sixth technology fund on €350m, bringing the GP's fundraising effort over the past 12 months to a total of €1bn. Index raised the oversubscribed fund within two weeks. That fund was closed three months after its €150m life sciences vehicle was raised, and seven months after its Index Ventures Growth Fund II reached its €500m target.

The last year has also seen Scottish Equity Partners (SEP) raise two funds worth nearly £300m: SEP IV raised £200m at the end of 2011 while £95m was raised for its Environmental Energies Fund at the same time. Creandum held a first close of €92.5m in April and has a target of €150m.

And homeruns aside, GPs are finding other innovative ways to pump distributions to investors. Since its 2007 fund, Abingworth has coined its VIPE strategy – venture investment in public enterprise. By backing listed businesses, the GP can sell down to provide distributions to its LPs.

"LP sentiment is improving very gradually," Van Rensburg says, comparing it with the appetite for debt: "In 2009 everyone started talking about debt, but we're only now seeing the investment coming through. Fundraising always lags the initial excitement and venture is likely to be the same."

What is noteworthy in this latest venture renaissance is that it includes successes of lesser-known GPs that have been toiling away behind the scenes in the 2000s.

These newer outfits offer investors a hunger to prove themselves as well as vitality - just as some of the older groups face succession issues. Tomorrow's venture landscape could therefore be more prominently characterised by less renowned brands while erstwhile key players become less significant.

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• Topics
• UK / Ireland
• France
• Nordics
• Benelux
• DACH
• Southern Europe
• CEE
• Exits
• Fundraising
• Venture
• DN Capital
• Advent Venture Partners
• Sofinnova
• Scottish Equity Partners
• Abingworth Management