Navigating the not-so-quiet waters of private equity and venture capital

After 2-3 busy years, 2023 brought along a quieter market, or at least so it felt. This gave Limited Partners (LPs) some much-needed time to reflect and conduct their due diligence work. Interestingly, activity in Europe remained high — according to Invest Europe’s new report, ’Investing in Europe: Private Equity Activity 2023’, fundraising in 2023 reached €133 billion, down only 3% from the previous five-year average — and those five years were all-time highs in terms of activity.

The fundraising market changed, partly driven by LPs. Some General Partners (GPs) were able to raise funds with accelerated processes. This fundraising was prioritised by LPs, placing these same GPs in a very advantageous position. As an LP, you obviously want the GP teams to spend their time on sourcing, investing, and managing the portfolio, rather than having the senior team spend 18 months or more on fundraising. We have noticed that the latter can actually be quite disruptive, preventing GPs from being consistent and missing out on potentially good investments.

Invest Europe data shows that more than 700 funds raised capital during the year, in line with the 2020 figure. Two hundred and forty-two funds reached final closing in 2023, raising a total amount of €137 billion since inception. While this is the highest amount of funds raised at final closing in any year, many of these GPs had also been in the market throughout 2022. Unsurprisingly, venture capital (VC) and growth equity experienced lower capital inflows, while fundraising for European buyouts reached €95 billion, representing 72% of the total amount raised during the year —  slightly above average for the last five years.

Here again, we saw a bifurcated market. Most capital has been allocated to funds in excess of €1 billion, and within this group, there are a handful of European GPs that have raised €5 billion and significantly more.

As a result, dry powder has not been an issue. Some €100 billion of equity was invested in European companies in 2023, with the mid-market buyout segment accounting for 38% of what was invested in buyout companies, according to the Invest Europe report.

Divestments were down 15% year-on-year. The lack of liquidity has been the main headache for LPs. If you are running a mature program, you need exits to be able to meet calls to fund new investments and still have balance in the portfolio. If performance continues to be good, combined with fewer exits, the risk of becoming the victim of your own success increases.

Fortunately, both pension funds and insurance companies seem to be sticking to their commitment strategies. In this asset class we need to be patient, prepared to live with both a faster market and a slower (exit) market. Pension funds and insurance companies with long-term commitments remain well positioned as investors in alternatives, with the ability to handle the cyclical element of the industry in terms of fundraising, calls, distributions, returns, etc. Ultimately, it is the long-term commitment to the asset class that will generate returns.

For Skandia, private equity and infrastructure account for approximately 20% of our balance sheet (at year-end 2023). We have been consistent investors in alternatives since the 1980s, and the PE program has generated strong returns for our clients. We believe there will always be cycles. Market timing is challenging and maintaining a long-term investment program is essential for success.

The not-so-quiet waters of 2023 are proof that the actors in the private equity industry are consistent and in it for the long-haul.

Sofie Kulp-Tåg

Senior Investment Manager
Skandia Mutual Life Insurance Company
Member, LP Council, Invest Europe