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Q1 fundraising signals clearer skies ahead

The first quarter of 2004 has demonstrated a marked improvement in global fundraising performance. But while for US teams a recovery seems well underway, the European private equity industry will have to wait a little longer before it can finally breathe a sigh of relief.

The jumble of geopolitical and financial instability in the early months of 2003 meant the first quarter was always going to be a fundraising low for private equity firms in both Europe and the US. The result has been a flattering leap in fundraising in the corresponding period of 2004 that makes it difficult to discern the extent to which a strong recovery is underway. European private equity firms announced a total of 14 final closes in the first quarter worth a total of E6.5bn, compared with just nine closes worth E2.1bn in the same three months of 2003. The upturn was even more dramatic in the US, where there were 34 final closes worth $16.1bn, compared with 19 worth $7.8bn in the first quarter of last year.

The certainty of this latest data is that the worst is over for the private equity universe as it tries to raise fresh capital. This year looks comfortably set to improve on last year's dismal performance and the improvement should be felt across most stages. Buy-out, venture, mezzanine, secondaries, and generalist firms will all benefit from a more receptive institutional community on their fundraising rounds. But any idea that we will soon be reliving the 1990s high times of eager chequebooks and impatient investors are sorely misplaced. This year will be better than last but the likelihood of a dramatic upturn is slim. The difference simply relates to immediate liquidity - the availability of cash. An improvement in public markets and a related increase in distributions mean many of them have money to spend for the first time in a long while. But investors remain as selective, discriminating, and cautious even, as they have been for the last two years.

That much is clear in the identity of the recent successful fundraisers. They are almost entirely familiar names with long track records or immaculate pedigrees. Look at the litany of US venture funds that helped swell the most recent quarter's intake to almost $8bn from last year's paltry $1bn; Venrock, New Enterprise Associates, Alta Partners, Kleiner Perkins, Charles River. There is none of the sort of first time funds staffed by fresh-faced investment bankers or consultants that featured at the top of the cycle. Equally, final closes have not been achieved in the easy snap of well-tanned fingers. Many of the groups that closed in the first quarter were in the market for a long time, in excess of 12 months, and will feel their close is deserved. Look at the European buy-out firms that announced a close during the period in question. Terra Firma, first time fund in name but not in concept, had been in the market for nearly two years and will be spending much of its establishment fee on new shoe leather. Nordwind, another so-called first time fund but benefiting in no small way from the leadership of Carlyle veteran Hans Albrecht, may have exceeded its initial target but still took more than 18 months to get there.

So for all the apparent improvement in fundraising, closer inspection suggests the environment is still far from universally accommodating. The so-called 'flight to quality' that provided the simplistic characterisation of fundraising last year remains as true as ever. The difference lies in there being more quality in the market, most conspicuously in the US venture market, which is helping to inflate the headline fundraising figures. There remains, however, a hangover from the effects of the last 18 months of dismally tough marketing that will cap the prospects for a massive increase in total fundraising this year, particularly in Europe. There are still only a handful of large buy-out groups in the market in Europe. This is partly because many of them have not yet invested enough of their last funds to warrant a return. But it may also be because many of them have yet to generate sufficient realisations out of their portfolios to provide the momentum for a Permira-style fundraising campaign. The same is even more the case for Europe's venture groups, who remain very light in the way of exits. US groups, by contrast, are often a little further along the curve, reflecting the advancement of their financial market cycle. The IPO window in the US, for example, has had a good six-month head start on Europe and corporate buyers have also been busier, which in turn means more capital to return to limited partners and more capital to come back.

The result is that the US fundraising recovery this year is likely to look more pronounced than the European recovery. Europe's jump will come in 2005, when a series of large buy-out groups, such as BC Partners, can be expected to close the funds they launch in the second half of this year. It is these funds, after all, that provide real boost to headline figures. Permira's close alone accounted for more than a quarter of last year's total. The European venture fundraising recovery will be less remarkable. There are no billion-dollar prospects like New Enterprise Associates and only a relatively small number of groups that are widely considered top tier. Many of them will be in the market this year but their smaller number and more modest fundraising ambitions means they will still be making a much less significant impact on the headline total than their US counterparts.

Chris Davison is Head of Research at Almeida Capital

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