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Global venture capital insights and trends report 2011 - Venture capital perspectives - Europe - EY - Global

Global venture capital insights and trends report 2011

Venture capital perspectives - Europe

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"Equity will be the principal source of capital for the next five years, with European VC and PE firms holding a staggering US$138 billion of dry powder." Julie Teigland,
EMEA VC Leader, EY

Outlook: resilience in the face of volatility

  • The European VC industry showed surprising robustness in the face of highly volatile capital markets. In 2011 and 2010, European VC showed signs of a tentative recovery after a particularly challenging 2009, although activity is still significantly below pre-crisis levels.

    However, equity will be the principal source of capital for the next five years, with more companies looking to VC to finance growth. European VC and PE firms hold a staggering US$138 billion of “dry powder” and are seeking opportunities before their investment periods end.

  • Medium-term growth potential remains muted due to sovereign bond tensions and a prolonged period of pressure on small businesses, including tax increases and a very high cost of capital. Because risk appetite is unlikely to return to pre­2008 levels, the availability of external finance will continue to be affected. Additionally, VC houses have to operate in a more demanding regulatory environment with increased reporting and capital obligations.

Fund-raising declines

Fund-raising declined as limited partners focused on top­ quartile performers with proven track records. 2011 saw the worst volume since 2004, as European fund-raising fell 11% year-over-year to US$2.9 billion for 41 funds (compared to US$3.0 billion for 51 funds in 2010). In 2011, US$6.1 billion was raised in 1,012 rounds. (At the same time, 2010 had 51 funds closed worth US$3.4 billion off the high of 2008, which had 119 funds close worth US$10.5 billion. US$6.7 billion was raised in 1,253 rounds.)

  • The average amount of capital raised per company is increasing as bigger businesses are being built. Although Europe has seen a decline in number of deals over the past decade, it has maintained investment levels, which has led to larger deal sizes overall. The median round size in 2011 was US$2.7 million (up from US$2.6 million in 2010).

  • In 2010, the UK and Ireland continued to raise the most capital in Europe, while France came in second, followed by Germany and Switzerland. In 2011, the UK raised US$1.7 billion through 274 deals (down from US$2.6 billion raised from 331 deals in 2010). France raised US$1 billion in 217 deals in 2011 (compared with US$1.1 billion of investment raised through 266 deals in 2010).

Key Europe VC statistics

 200920102011
Invested capital (US$m)$5,153$6,688$6,118
Investment rounds1,1861,2531,012
Median round size (US$m)$2.1$2.6$2.7
Number of VC-backed IPOs31814
IPO capital raised (US$m)$171.1$563.9$990.1
Median time to IPO (years)N/S3.88.9
Number of VC-backed M&As1931912%
Median M&A valuation (US$m)$26.9$23.13%
Median time to M&A (years)5.65.71%

VCs skewing to early-stage deals

In 2010 and 2011, there has been continued consolidation and specialization of funds, whether it be in stages of financing or industry, as fierce competition for quality assets persists.

Europe shows a preference for early-stage VC funds. Of the 41 funds, 27 early-stage funds took US$2.5 billion of the total US$3.0 billion raised in 2011. The 27 early-stage funds tended to focus on higher-potential areas, such as cleantech. Despite the early-stage preference, VCs are also channeling significant later-stage capital into their mature portfolio companies to ready these businesses for exit.

As a result, VC investment is being pushed out to an acceptable risk level for angel investors (i.e., increasing the level of returns that a VC firm can afford to request commensurate to the risk they take at a later stage). Also contributing to the expansion of the angel investor market are new governmental tax schemes in countries such as the UK and France that encourage high net worth individuals to invest in start-up companies.



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