Levels of private equity investment have increased in 12 European countries despite the listless economy, a recent report shows. Vincenzo Morelli tells EURACTIV the findings show that companies backed by private equity are the most innovative in Europe.
Vincenzo Morelli is senior advisor at TPG Capital, a private equity firm. In addition to chairing the European Private Equity and Venture Capital Association (EVCA), he is also a director of Oxfam’s enterprise development programme. He spoke to EURACTIV's Jeremy Fleming in Brussels.
How is the private equity (PE) market holding up at the moment?
Private equity invested €36.5 billion in nearly 5,000 European businesses in 2012, a similar number of companies to 2011. Nearly half of those were private equity backed for the first time. This proves private equity’s continued commitment to and belief in Europe and show how we can act as an alternative form of company financing for suitable companies. Venture capital continued to back 2,900 companies a year.
Not only that: private equity is attracting investible funds into Europe. The Frontier Economics report focuses on the top 12 European private equity markets, where almost €250 billion was invested in more than 19,400 companies between 2007 and 2012 €70 billion of that was raised from outside Europe. This is remarkable because PE investment was up compared to the previous six-year period, at a time when general levels of private investment in Europe were plunging by several hundred million euros.
No one is saying that these aren’t challenging times economically but the report shows that private equity has a role to play in getting Europe moving again because it demonstrates that private equity investment boosts productivity, competitiveness and innovation in the businesses it invests in, about 85% of which are SMEs – which are so important for growth. We are not a “magic bullet” solution but we can make a very significant contribution.
Are any forthcoming EU initiatives going to support or increase it?
Yes. European [venture capital firms] have teams with a combination of skills comparable with any Silicon Valley outfit. These teams are not inexperienced, just undercapitalised. This is partly due to structural reasons. Europe lacks a class of institutional investors with the knowledge and capacity to manage VC programmes. By way of example the United States has 55 university endowments, traditional investors in venture capital, all of which are valued at over €1 billion. In the European Union there are only three. This is where the idea of 'funds of funds' could be so important. Part of the EU budget is the COSME and Horizon 2020 programme. Those programmes have about €1 billion set aside for a number of these fund-of-funds.
The funds of funds will act as public/private partnerships. Experienced private-sector funds of funds managers with existing venture capital investment commitments, and established client bases of institutional investors will be able to match investment from the European Commission with institutional capital. The result will be, over time, a much needed expansion of the European venture capital investor base. That can then lead to more innovation and growth.
We are also encouraged that the European Venture Capital Funds Regulation was recently agreed approved by EU institutions, which will simplify cross-border fundraising for many smaller, growth-oriented funds.
By what measure does your report show PE-backed companies are more innovative?
The report shows that patents for new innovative products granted to European private equity-backed firms over five years to 2011 are approximately 116,000 and are potentially worth up to €350 billion, or nearly twice the total amount of private equity investment during the same period. When private equity invests in a company patent citations go up by a quarter. So it’s a real innovation boost. The report triangulates research by leading academics and the World Intellectual Property Organisation to reach this conclusion.
Are there any trends in terms of sectors which are getting PE backing at the moment?
The sectors that private equity invests in are quite constant over time. Three of the top five sectors benefiting from private equity investment – business and industrial products, life sciences and communications – are capital intensive and typically receive significant investment in physical capital including infrastructure, machinery, buildings, and IT equipment and software.
How does European PE compare at the moment with US and Asian PE?
The US accounts for about half of the global volume of private equity investments. Europe remains stable at about 22% followed by Asia with 14%. This trend is relatively stable over the past 10 years. Fundraising figures are relatively similar. However, Asia has caught up with Europe over the past three years accounting for about 30% of global fund-raising. In contrast, European fundraising is at around 22%.
The US has 72% of global venture capital investments. Europe has 14%, followed by China which accounts for about 11%.
At the EVCA we champion Europe as a first-class investment destination – it has so much to offer. We explain to overseas investors that, for example, private equity investment builds better businesses through operational improvements grounded in the real economy.
In Europe today there is a combination of highly motivated entrepreneurs and experienced venture capital fund managers with the right skills to commercialise innovation on a global scale. Europe is home to innovative, global companies such as Skype, SoundCloud and Spotify. The clustering around innovation hubs, such as Berlin, London and Stockholm, is revolutionising start up success in Europe. There is huge untapped potential here.
The EVCA is working hard to spread that message and to encourage the funding the sector deserves to be invested in Europe.