The U.K. private equity industry is becoming increasingly reliant on U.S. sources of capital, the British Venture Capital Association’s (BVCA’s) 1998 Report on Investment Activity reveals.
While total funds raised by U.K. private equity groups declined by 14% to GBP5.57 billion ($9.051 billion) in 1998 from GBP6.49 billion the previous year, the amount committed by North American investors rose by slightly more than GBP500 million to GBP2.865 billion. Transatlantic capital therefore accounted for more than half of all U.K. funds raised last year, compared with 36% in 1997. By contrast, contributions by U.K. investors plummeted in 1998, falling to just GBP1.51 billion, or 27% of total funds raised, from GBP2.79 billion (43%) the previous year.
Continental European investors, who increased their commitments to U.K. private equity funds more than six-fold between 1996 and 1997, maintained their appetite during 1998, contributing GBP815 million, or 15% of the total raised, compared with GBP842 million (13%) the year before.
U.K. Pensions Develop Cold Feet
Much of the decline in domestic participation in private equity can be laid at the door of U.K. pension funds. Domestic pensions provided only GBP553 million of new capital to the private equity industry last year, a figure that is dwarfed by the GBP1.87 billion in commitments received from their overseas counterparts. In both 1998 and 1997, U.K. pensions contributed only 10% of total U.K. private equity funds raised, a decline from 30% in 1996.
The amount contributed by U.K. insurance companies to the domestic private equity pool also fell dramatically between 1997 and 1998. Last year, such groups committed only GBP152 million to U.K. private equity funds-just 3% of total funds raised-compared with GBP1.16 billion, or 17% of total commitments, in 1997.
However these numbers may be skewed as insurance companies’ investment in private equity surged in 1997 following regulation changes. The BVCA attributes the decline to the different profile of the funds offered last year rather than to any substantial change in insurance companies’ opinion of the asset class as a whole.
Overall, U.K. investors committed 46% less capital to domestic private equity funds in 1998 than in the previous year. More importantly, and with particular reference to pension funds, a startling finding has arisen from a recent poll of U.K. investors undertaken on behalf of the BVCA: Nearly half of U.K. investors that have never invested in U.K. private equity said they would not consider future investments in the asset class.
Buyouts Figure Prominently in 1999
The bulk of U.K. unquoted equity funds raised last year is slated for investment in buyouts and buy-ins, with more than GBP4.9 billion, or 88% of total funds raised during the year, flowing into MBO/MBI vehicles.
Of the capital committed to buyout funds, more than half went to vehicles targeting transactions valued at GBP100 million or more and, overall, an estimated 71% of the capital raised last year by U.K. private equity houses is slated for disbursement in deals valued at more than GBP50 million. Funds targeting transactions in this size range tend to have a regional rather than a purely U.K. focus, and the BVCA estimates that more than 50% of funds raised by U.K. groups in 1998 will be invested outside the domestic market.
Worldwide investments by U.K. private equity groups reached a record GBP4.919 billion in 1998, 18% more than the previous year, of which 77% was committed to U.K. companies. However, the survey does not include disbursements made through U.K. firms’ overseas offices. Since the BVCA’s members currently boast 137 offices outside of the U.K., the actual figure for investment outside the U.K. is a multiple of the GBP210 million deployed in foreign investments from bases within the U.K.
A full 70% of the GBP3.78 billion invested within the U.K. was absorbed by buyouts and buy-ins, although such deals accounted for only 29% of recorded transactions.
The number of U.K. buyouts and buy-ins fell to 320 last year from 349 in 1997, the third successive year where MBOs and MBIs have declined as a percentage of the total deal population. Small and mid size deals (defined by the BVCA as deals involving equity of GBP10 million or less) accounted for 75% of buyouts and 85% of buy-ins backed. Thanks to a small number of mega-deals, however, larger buyouts and buy-ins (deals involving more than GBP10 million of equity) absorbed GBP2.02 billion, or 76%, of total investment in this stage category.
The most dramatic developments in the U.K. investment landscape last year took place at the opposite end of the investment spectrum. The value of start-up investments increased by 91% to GBP111 million, while early-stage investments absorbed a further GBP177 million, 75% more than in 1997. Together, start-up and early-stage investments accounted for 21% of all companies backed in 1998, the highest level seen in at least seven years.
Sources of U.K. Private Equity Fund Raising
Source Type Amount raised (GBPm) % of amount raised
1998 1997 1996 1998 1997 1996
Pension Funds U.K. 553 622 734 10 10 30
Overseas 1,875 1,397 519 34 21 21
Insurance Cos. U.K. 152 1,160 221 3 17 9
Overseas 193 505 104 3 8 4
Corporations U.K. 83 376 29 1 6 1
Overseas 432 428 51 8 6 2
Banks U.K. 383 238 68 7 4 3
Overseas 640 467 153 11 7 6
Endowments U.K. 5 10 56 0 0 2
Overseas 434 234 82 8 4 4
Individuals U.K. 157 164 68 3 3 3
Overseas 152 142 108 3 2 4
Other Sources U.K. 182 228 207 3 4 8
Overseas 329 525 45 6 8 2
Total U.K. 1,515 2,798 1,383 27 43 57
Overseas 4,055 3,698 1,062 73 57 43
GRAND TOTAL 5,570 6,946 2,445 100 100 100
Source: British Venture Capital Association
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