European fundraising has worst quarter in eight years
Political uncertainty has made investors pause
Fundraising for European buyouts has hit its worst quarter since 2010 as the divorce between the U.K. and European Union has fueled a sharp decline in investors’ appetite for U.K.-dedicated funds.
Fund managers have struggled to keep pace with the record volumes of cash raised for the asset class last year.
Both capital-raising and the number of fund closings fell in the third quarter, according to LP Source Inc., a data provider owned by Private Equity News’ publisher Dow Jones & Co.
Buyout fundraising dropped 68% to $7.87 billion across 33 funds in the third quarter, down from $24.58 billion raised by 46 funds during the same period last year. Fundraising also declined one-fifth during the first half of this year to $46.62 billion, down from $67.7 billion in the corresponding part of 2017.
The figures represents the worst third quarter for European buyout fundraising since 2010, when limited partners invested approximately $7 billion in the asset class in the quarter.
“In Europe, some investors— but by no means all—are taking a break when it comes to commitments,” said Antoine Drean, chairman of private-equity fund advisory Triago.
While growth expectations for buyout funds remain strong in North America, in Europe investors have shown declining appetite for buyout funds, according to a survey by placement agent Rede Partners LLP. Uncertainties surrounding a deal between the U.K. and the European Union have hit investors’ sentiment, Rede said in the Rede Liquidity Index for the second half of 2018.
The U.K. lost 18 points, scoring 55 in Rede’s latest investor sentiment index, but appetite for buyouts in North America, Europe and the U.K. altogether decreased by only two points compared with the first half of the year, according to Rede Investment Index, which forecasts limited partners’ appetite for private-equity funds.
“Investors are pausing for the time it takes to see how Brexit shapes up and how new governments in Italy and Spain settle into Europe,” Mr. Drean said.
Last year, U.K. midmarket firm Lyceum Capital Partners—run by veteran deal maker Jeremy Hand—began raising its latest buyout fund but it eventually shelved the plan after some investors declined to reinvest, WSJ Pro Private Equi- ty reported earlier this year. One Lyceum investor said at the time that the firm’s fundraising bid wasn’t helped by the fact that it had deployed its previous fund slowly and hadn’t sold any of its portfolio companies. Lyceum has since moved to a deal-by-deal strategy.
Recently, U.K.-based buyout firm Epiris said it had raised 821 million pounds for its first buyout fund since it split from Electra Private Equity PLC, less than the £1 billion WSJ Pro reported it was seeking to raise for the vehicle late last year.
Despite political turmoil caused by the election of antiestablishment parties in Italy and the Spanish political upheaval following the Catalan government’s declaration of independence, investors predict they will increase allocations to Southern Europe.
Investor sentiment for Southern Europe is up six points to 63, according to the Rede index. The confidence is strong also in German-speaking countries, which gained 13 points in the index, or France, which rose by five points.
Capvis is one example of a European midmarket firm eschewing the U.K. market that attracted significant investor interest for its latest fund.
The firm’s nearly1.2 billion euro fund is among the largest closed in the third quarter this year, according to data provider Preqin Ltd.
The Luxembourg-registered fund is much larger than the 740 million euro vehicle it raised in 2014. Capvis will target, like its previous funds, midsize companies based in Switzerland, Germany, Italy, Belgium, the Netherlands and Luxembourg. Capvis said it has received cash from new and existing investors from all over the world.
Growth in fundraising is increasingly driven by non-European markets. For instance, investment volume in buyout funds in the Asia-Pacific region grew by 126% to $13.3 billion in the third quarter, from $5.9 billion during the same period last year, LP Source said.
Total private-debt fundraising for Asia Pacific jumped 12,810% in the third quarter to $258 million from a negligible $2 million in the third quarter 2017.
“Record fund sizes are increasingly influencing fundraising, and around the world we’re seeing more uneven peaks and valleys,” Mr. Drean said.
“Much of the year-over-year slowdown in Europe is actually due to this, though the trough in 2018 is deeper than it would otherwise be because of uncertainty in places like Italy, Spain and the U.K.”
Whereas investors often seek to balance risks by investing in multiple countries in Europe, they have put a negligible amount of capital in European industry-focused funds this year, LP Source said. Capital raised for funds investing in specific sectors dropped to $11 million in the first nine months of the year, from approximately $805 million in the first three quarters of 2017.
London-based advisers say they expect fund managers to easily reverse the fundraising numbers for buyouts to the record levels seen since 2015, as the asset class continues to offer good returns.
“I think most houses predict that Brexit will result in a hiatus in transactions,” said Paul Dolman, head of private equity at law firm Travers Smith LLP. He said, in the long run, it will be “business as usual” for the asset class.
Investor demand for privateequity investments continues to be strong because globally such deals have shown solid economic fundamentals, Mr. Drean said. “We expect European fundraising to hit new heights once we have more clarity on Brexit and on the political situations in Spain and Italy,” he said.
Meanwhile, the fast-growing debt market, which has flourished after banks pulled back from lending following the financial crisis, attracted investors seeking the high yields on offer from backing European companies’ debt.
“Debt funds are particularly appealing because on average they offer high single-digit yields at relatively low risk in an environment of near-record low interest rates,” Mr. Drean said.
Firms raised $6.85 billion for European private-debt funds in the last quarter, up 20% from the $5.73 billion raised in the third quarter of 2018.
For example, asset-management giant LGT Group, which manages more than CHF200 million ($201.3 million) of total assets, raised almost $726 million for a debt fund in August, according to filings with the U.S. Securities and Exchange Commission.
The fund is the first vehicle LGT raised since it acquired direct-lending firm European Capital, now known as LGT European Capital Ltd., from U.S. private-equity shop Ares Management LP in 2017.
At the end of June, there is more competition among private-debt funds than ever before, a Preqin report published at the time said.
The promise of high yields could boost even greater interest in the asset class, Mr. Drean said. “In fact, I would not be surprised if in a few years private credit funds’ assets under management match or surpass private-equity assets under management,” he added.