LONDON - After years in the doldrums, European buy-out funds are enjoying their biggest fund-raising year since 1989.
Buy-out funds for the United Kingdom and continental Europe are seeking to raise more than 1.25 billion ($1.86 billion) from institutional investors. That's more than three times the amount raised in 1991 or 1992, according to a report by Initiative Europe, a London-based publisher of buy-out and venture journals.
"Certainly this year, I would expect a very major increase, approaching the levels we had in '89," said Ken Robbie, research fellow at The Centre for Management Buy-out Research, a unit of the University of Nottingham's School of Management & Finance.
Already, one fund has raised 235 million European currency units, and another has raised its target by 50 million.
Buy-out funds are drawing interest from institutional investors spanning the globe. Pension fund investors that have made or are considering new commitments in pooled vehicles include the American Telephone & Telegraph Co., Berkeley Heights, N.J.; the California Public Employees' Retirement System, Sacramento; and the Massachusetts Pensions Reserve Investment Management Board, Boston. In addition, the pension funds of General Motors Corp., New York; NYNEX Corp., New York; and IBM Corp., Stamford, Conn.; are believed to be investors.
With Europe starting to come out of recession, the timing for equity buy-out funds may be ripe. European companies are selling off non-core businesses to generate cash that can be redirected to their main businesses, explained J. Gordon Bonnyman, managing director of Charterhouse Development Capital Ltd., London, which is trying to raise 250 million for a European buy-out fund. In addition, some family-held firms are being sold off as their owners retire.
Returns from these funds can be alluring, with managers typically reciting historical figures around 30% a year. But investors say experience has been mixed, with some managers producing abysmal performance.
European buy-outs offer good diversification to U.S. private equity investments, said West Coghlan, senior investment officer for the Massachusetts PRIM, which invests 17% of its $600 million alternative investment portfolio to the area. Later this year, the board will pick managers from a list of six of international buy-out and venture capital managers to run another $40 million. The buy-outs have "a separate economic cycle, a separate currency cycle, and separate pricing to the U.S.," he said.
Fund-raising efforts are driven by more than fundamentals. Several experts noted buy-out funds raised in 1989 now have been invested fully, and managers are returning to the market to replenish their coffers. Thus, larger pools in the 150 million to 250 million range are being marketed by such London-based firms as Charterhouse, Candover Investments PLC, Morgan Grenfell Development Capital Ltd., Schroder Ventures and 3i PLC.
One big boost to the market came last November from a $30 million to $45 million commitment by the $82 billion California Employees' pension fund to Candover's fund, which will invest mostly in the United Kingdom. And there are a host of midtier and country-specific pools being marketed as well.
Most emphasis, though, is being placed on Britain, whose economy is coming out of recession faster than those of the Continent. In addition, the U.K.'s capital market is much more developed, enabling buy-out companies to be floated in a much shorter timeframe than on the Continent, Mr. Robbie said.
"We're still nervous on the Continent in that the infrastructures" - such as individual country economies or the dominance of banks in some markets - "are still questionable," said Stanley E. Pratt, general partner, Abbott Capital Management L.P., Needham, Mass., which invests in a variety of private equity vehicles.
But some experts point to negatives in investing in the United Kingdom. With stock-market values at record levels, some companies that would have been buy-out candidates in years past have gone directly to the market, observed Ian Parham, director of CVC Capital Partners, London, which was spun off from Citicorp last year.
In the United Kingdom, buy-outs "increasingly are more competitively priced. The number of situations may reduce as the stock market offers opportunities to miss out on the buy-out phase," Mr. Parham said.
Opportunities exist in the Benelux countries, France, Ger-many, Italy and Spain, although the risks probably are higher than in the United Kingdom, said Russ Steenberg, vice president-corporate finance for AT&T Investment Management Corp. "Our bias is there is enough of a distinction in each of those countries to find experts" in each market, he said.
The attractions on the Continent are enough for 3i to raise its first pool for outside investors since the investment capital group was created in 1945. The initial closing raised 238 million ECUs ($210 million) from five institutional investors in Europe and Asia. The fund, which will provide growth capital to family businesses and buy-outs, is expected to close at 300 million ECUs this month, and likely will include some U.S. pension fund commitments, said Neil Cross, 3i's international director.
The fund already has started making investments. Last month, it provided the part of the equity financing for the 30 million deutsche mark ($17.6 million) buy-out of Passport Moedevertriebs GmbH, a knitwear company in Boeblingen, Germany, whose founders wanted to pass the reins to younger hands, said Thomas Schlytter-Henrichsen, managing director of 3i's Frankfurt office.
Recently, it became known that 3i itself will go public, after an aborted effort in 1990, with about one-third of its equity being floated, reports said. Some investors worry it will crowd out other middle-market players, as investors buy 3i's stock as a play on the sector instead of locking up their money in 10-year limited partnerships.
One huge barrier to institutional investment is the quality of performance numbers. In an attempt to develop a reliable data base, the British Venture Capital Association, London, recently gathered data from seven different venture capital pools. But Vicki Mudford, the group's secretary, said it was hard to get everybody to supply data in the same way.
Another key issue is the constancy of investment personnel. The departure last month of Jon Moulton, managing director of Schroder Ventures, in the midst of marketing efforts is seen as damaging to the fund. Linda Vincent, senior vice president of Schroder in Boston, said officials are "quite optimistic" that most of the fund's commitments will remain, and Schroder's new managing director, Peter Smitham, has been with the firm since 1985.
But investors, such as Messrs. Pratt and Steenberg, said having the right people is critical. "We're more interested in people than in organizations," Mr. Pratt said.