Secondaries players to fill later-stage gap

Let’s face it: for many LPs, European venture has been the ugly duckling, especially after the burst of the tech bubble at the turn of the century. The repercussions are still visible. Europe continues to lack sizeable local venture houses, with only a small number surviving the funding drought in the wake of the crash.

In contrast, the US venture market has fared comparatively better as North American LPs continued to support an asset class that had been sufficiently well established for several years before the crash to generate attractive returns. In Europe, on the other hand, LPs have set their focus mainly on the buyout space. “There’s a real need for a committed European LP base for venture,” agrees one placement agent. Indeed, when it comes to finding backers for venture funds, it is US LPs in general that venture houses turn to for fundraising.

The lack of local backing for European venture has further accentuated the funding disparity between the US and Europe. Some assert, though, that this could represent an opportunity for the industry this side of the pond, as the high volumes of capital flowing into US dedicated funds will inevitably lead to a stagnation or drop of overall returns of US venture.

Of course, in order for investors to be attracted to European venture, the asset class has to show stronger return performance than it has managed in the last decade. This problem, however, is inextricably linked to the dearth of LP capital, particularly at the later-stage end of the market. “European venture returns have historically been impacted by a strong bias in activity towards seed and early-stage investments,” notes Simon Cook, chief executive of DFJ Esprit, while highlighting that the US later-stage venture market is six to seven times bigger than its European counterpart.

Cook elaborates: “I therefore think later-stage investments are the way forward. First of all it provides early-stage investors with an exit opportunity, shortening their holding periods and creating some much needed liquidity in that space. At the same time the buyer benefits from a better risk/reward profile while the portfolio companies can rely on fresh funding sources.”

Significantly, there is an emerging trend towards secondaries investors moving in to fill this gap. Indeed, a handful of European venture houses have already raised dedicated secondaries funds, backed by established secondaries players, with a view to acquiring mature venture portfolios.

DFJ Esprit, for example, launched Encore Ventures early last year with the backing of Coller Capital and HarbourVest. The fund has already completed three deals, most notably the £130m acquisition of venture assets from 3i in September 2009. Earlier this week, German venture house smac partners teamed up with Headway Capital to acquire an Asian tail-end portfolio from iD TechVentures.

Teaming up with secondaries players has the added benefit of bypassing the issue of lacking LP support for the European later-stage venture space. Cook, however, cites the importance of government initiatives to support venture and fill the existing funding gap in the longer term. “The government needs to lead the way for investors, establishing the space so that institutions can follow later on, becoming committed venture investors.”

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• Topics
• Venture
• UK / Ireland
• Early-stage
• DACH
• Benelux
• France
• Nordics
• Southern Europe
• CEE
• LPs
• Fundraising
• Coller Capital
• HarbourVest
• Venture