Pension funds take lead in private equity investments

IN EUROPEAN PRIVATE equity markets, the vast bulk of the assets raised last year- about 80 per cent of the total US$92 billion - went into buyouts, not start-ups. The money was invested in mature companies, usually before their public listing.

The figures released recently by the European Private Equity & Venture Capital Association (EVCA) represent annual funds raised by private equity and venture capital management companies located in 27 countries Europe-wide.

What it means is that there is a large pool of money available for private equity investments, and it is not just high and ultra high net worth individuals with money who are interested in investing.

Some of the key investors in private equity funds are institutions, pension funds, and large listed companies in the United States and Europe with a desire to invest in something other than the traditional stocks and mutual funds. According to EVCA's figures, pension funds took the lead as the main source of capital last year, representing 25 per cent of the total funds raised and overtaking banks by US$6.4 billion for the first time since 2001.

Together, pension funds and banks provided almost 43 per cent of funds last year, representing a trebling in size of their allocation to private equity in absolute terms.

These and other figures released by EVCA showed that the total raised by the private equity industry in Europe was more than double the 2004 figure of US$35 billion.

Last year, in fact, was a record year in Europe for private equity fund raising after three years of lagging investment. At present investment levels, the funds raised will meet investment needs through to the end of next year, according to EVCA.

As the capital under management by private equity funds has increased, so too have the deals they have targeted.

Nine out of the 10 largest private equity buyouts have been executed in the past two years, including Investor Group's acquisition of Hertz for US$15 billion and SunGuard Data Systems for US$11.3 billion, Global Toys Acquisition's buyout of Toys 'R' Us for US$46.6 billion, and Zeus Holdings' acquisition of Intelsat for US$5.1 billion.

Following the data's release, Gemma Postlethwaite, vice-president of Thomson Financial, which jointly undertakes the annual EVCA survey with PricewaterhouseCoopers, said the funds raised last year were an unprecedented statement by investors that private equity was not only a mainstream asset class but one that consistently delivered returns.

EVCA figures on returns for buyouts in Europe in 2004 (the latest figures) bear this out.

Focusing on the internal rate of return, the one-year return was 20.9 per cent and for 10 years was 12.6 per cent. This compared with the return for one-year on all venture capital of 25.4 per cent and for 10 years, 5.3 per cent. Last year's figures included five buyout funds, which each raised more than US$3.8 billion in the period. More than US$14 billion was raised for ventures encompassing seed and start-up funding, an increase of 24 per cent on 2004.

'There is a lot more cash out there and available looking for opportunities,' said Nigel Sze, CEO of Barclays Wealth Asia 'More than two-thirds of the funds raised in Europe in 2005 was invested in buyout deals, which indicates to me that investors want quicker returns; they have plenty of cash and don't want to wait to spend the money.'

According to Mr Sze, the trends are similar in private equity markets in the US, where high and ultra high net worth individuals are being joined by institutions, pension funds and listed companies in the scramble to invest in private equities.

One trend is for the major banks to co-invest with their clients in private equity deals. Several banks, including Barclays, have followed this strategy.

Banks did it because they wanted to take the opportunity to invest money into these sectors. High net worth individuals liked to take advantage of the banks' expertise, Mr Sze said.

He said that private equity deals pushed by banks to their clients often performed better in terms of distribution and sales if the banks were aligned with the investors in a co-investment deal.

Investing with clients let them know that the bank had confidence in what it was doing. It was not just receiving the money and hoping to earn a fee for its investment advice; rather, its wealth managers were demonstrating a belief in the same investment opportunity, Mr Sze said.

Such optimism was well-founded and served the private banks well, he said.

'Today, what people are buying is not cheap. They are trying to find out what is reasonable because there is so much money being raised on the back of a good economy that they want to get in and then buy out in a shorter period. For the banks, it's about getting the right manager for individual clients so that they can generate the higher return.'