Private equity in 2005: Australian buyouts and European early stage investment activity

3 July 2006 Category: Private equity and venture capital No Comments

Venture capital takes off in Europe, Business Week, 26th March 2006

Extract:

““In 2005, European venture capital funds raised $16.1 billion, up 44% over 2004, according to preliminary data compiled for the EVCA by Thomson Financial and PricewaterhouseCoopers. That nearly matches the level of 2001.”“Startup funding has soared, too. Venture firms laid out $4.2 billion in early-stage capital last year, triple the amount in 2004.”

“Capping it off, venture capitalists are finally getting the welcome mat from European stock markets, which are inviting them to step up and cash out of their investments. The market for initial public offerings, which went cold for three years after the crash, topped $67 billion last year on European bourses, up nearly 65% from 2004, according to Dealogic. Among those IPOs were 99 venture-backed companies — twice the number there were two years earlier — that together raised $1.1 billion.”

“And trade sales, or acquisition of startups by other companies, climbed 27% in 2005, to $7.5 billion, thanks to an overall surge in European M&A. “It looks like a much more sober but receptive market for high-growth technology companies,” says Christian Claussen, a partner at TVM.”

“All of this is good news for the European economy. Venture-backed companies now employ one million people in the region, according to a research report by the EVCA. Even during the investment drought from 2000 to 2004, such startups created only 630,000 jobs. Overall, employment in venture-backed companies grew by an average rate of 30.5% per annum from 1997 to 2004 — 40 times the employment growth rate for the EU as a whole.”

“Companies with venture funding also invested, on average, $64,900 per employee per year on research and development — five times the average $10,700 spent per employee by the 500 companies with the largest R&D spending in the European Union.”

“Such outsize economic contributions highlight why venture-backed startups are so essential to Europe’s future. If investment levels continue to rise, the Old World could boost its pool of high-skill jobs — helping offset outsourcing to Eastern Europe, India, and China.”

“”This industry will help reshape society and work, creating skilled jobs in an increasingly global economy,” says TVM’s SchÃƒÂ¼ssler. Even politicians are starting to recognize that. European venture capital has come a long way in the last decade.”“

Australian Venture Capital Association Yearbook 2005

Note: 1 Euro = AUD1.87.

Extract:

Investments by stage

Investments by industry

My interest is early stage high growth companies. I relocated to Europe from Australia in September 2005 to pursue early stage business opportunities.

Australia has a population of 20m, compared to Europe’s 460m. Per head of population, Australia raised more capital for buy-outs than Europe, but invested an equal amount in early stage companies. Europe offers early stage companies greater opportunities to attract investment and achieve an exit. Europe invested US$4.2b in early stage investments compared to Australia’s approximately USD150m. Acquisitions of startups in Europe amounted to US$7.5b compared to a nominal amount in Australia. Australia has achieved stunning investment returns from buyouts (a 25% IRR over 5 years), exceeding the returns from the same class in Europe. Not surprisingly, buyouts dominate private equity in Australia. The Australian buyout industry is liquid, but early stage investing is small with few opportunities for exit.

Europe may offer a greater addressable market for the early stage entrepreneur, more opportunities to raise capital and a greater probabilty of achieving an exit. If a country is not an active investor in early stage companies, the entrepreneur may consider moving. The private equity industries in Australia and Europe are at more formative stages of development than the United States. In evolutionary terms, private equity in Europe and Australia may be decades behind the United States.
Europe may offer the early stage company a higher probability of an exit and a larger number of potential investors and customers. Most of the industries currently of interest to investors can be based anywhere.