Page 12 - Annual Report 2010

ANNUAL REPORT 2010

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Limited Partners continuing to find their portfolios are over-weight with private equity assets as the value of the rest of their portfolios has declined (the denominator effect), and facing liquidity constraints. There are some signs that the exit environment is improving from the situation in 2008 and 2009, in which the IPO market was virtually closed and there was an almost complete absence of trade buyers.

The buyout sector, having been the sector hit hardest in 2009 due in no small part to the drying up of leverage, has been the quickest to rebound with the pick up in eco-nomic growth and improvements in financial markets.

By contrast, the environment remains difficult at the venture end of the market, particularly for seed and start-up invest-ment. The availability of equity for early stage funds has been reduced significantly, with much of the institutional fundraising activity at this end being driven by public or semi-public Limited Partners.

There are reasons to be positive about private equity’s prospects for the coming year, as the stock of uninvested funds (‘dry powder’) remains high, and valuations are his-torically low meaning that there are good opportunities available to cash-rich investors in times of recession.

Structured finance/Securitisation

The European Structured Finance market grew steadily from the beginning of the decade until the outbreak of the crisis. During the crisis, issuance remained at high levels, but these

to be tightened significantly. Although the European Cen-tral Bank sees evidence of short- term upward pressure on the overall Eurozone inflation, stemming largely from increasing commodity prices, core inflation is expected to remain benign. Structural imbalances, particularly large current account deficits, continue to hold back a number of countries, and reflect longer term competitiveness issues that need to be addressed.

The situation of core markets in which EIF is active as Europe’s leading developer of risk financing for entre-preneurship and innovation with a focus on SMEs is as follows:

Equity

There are some indications that private equity and venture capital (PE) activity in Europe has begun to pick up from the depths plumbed in 2009; in 2010 investment activity increased by 69% and divestment by 54%, albeit all from a very low base. By contrast, fundraising remained in the doldrums, virtually unchanged from 2009.

The improvements in 2010 should be seen in the context of the extreme economic uncertainty in 2009, which drove activity to historic lows; the economic environment has im-proved somewhat, but the industry is very dif ferent from what it was in 2005-07. Furthermore, much of the increase in investment activity in 2010 has been directed towards supporting existing portfolio companies rather than new acquisitions. Clearly, fundraising remains challenging, with

H1 2010 2007 2004 2009 2006 2003 2001 2008 2005 2002 2000

  Funds raised     Investments     Divestments

120 000

100 000

80 000

60 000

40 000

20 000

0

I I I I I I I I I I

Figure 2: European PE activity by amount (in EURm)

Source: EVCA/PEREP Analytics for 2007-2010; EVCA/Thomson Reuters/PwC for previous years