August, an investment platform based in Luxembourg and Belgium, recently a strong rebound in European PE fundraising after a challenging Q1.
European PE fundraising soars
In Q2 2023, European PE managers secured commitments of €72.2bn, a 50% jump from Q2 2022, and almost double from the Q1 2023 figure of €36.5bn.
This suggests a revival of private markets after a tepid start to the year. By the end of June 2023, European PE managers had amassed €232.9bn in funds, a 26% hike from the previous year, emphasising the fundraising momentum.
HSBC’s inaugural UK SME fund led Q2’s fundraising with €17.2bn. Notably, all top three funds for the quarter were credit-focused, including Permira Credit Solutions V (€4.2bn) and LCM Credit Opportunities IV (€4.1bn).
This rise in credit investments, as observed by August, coincides with Europe’s increasing yields after years of stagnant interest rates.
Credit markets’ resurgence
As Europe’s risk-free rates (such as German government bonds) surpass 2% and banks pivot away from primary lending activities, companies face increased financing challenges, resulting in broadened corporate spreads.
Private markets are filling this gap, lured by potential attractive yields and the reputed stability of credit markets.
However, August has sounded a note of caution, anticipating a rise in defaults as Europe possibly approaches a recession. The firm believes that credit markets may be underpricing the inherent risks and has advised caution when engaging in the current credit environment.
Benelux PE fundraising faces challenges
In Q2 2023, managers based in Benelux raised roughly €3.7bn, marking a 40% decrease from the near €5bn in Q2 2022 and aligning closely with the €4.1bn of Q1 2023.
Over the year concluding on 30 June 2023, they collectively secured around €9.4bn in funds, a near 50% drop from the preceding 12 months. This reflects the fluctuating dynamics of the region’s fundraising, especially given the relative strength in Q1.
Top funds from the Benelux region over the past year encompass the Waterland Private Equity Fund IX (€3.5bn) followed by the Triton IV Continuation Fund (€1.6bn) and the Forbion Ventures Fund VI (€750m).
GP-led secondary transactions on the rise
Triton’s fund underscores a burgeoning shift towards continuation funds by fund managers. Designed to address liquidity demands, these funds maintain control over key assets. In the case of Triton, they integrated four enterprises from the Triton IV fund into a newly established platform, receiving support from notable secondary fund managers like HarbourVest Partners and LGT Capital Partners.
Often described as GP-led (general partners) ventures, these setups see a fund sponsor move one or more assets from a current fund to a new one. The new fund continues to be overseen by the original sponsor, predominantly financed by secondary buyers who jointly negotiate transaction details and pricing. Notably, GP-led secondary transactions, which made up 24% of the market in 2016, expanded to capture over half of it by 2021.
Recent research by Bain & Company unveils a growing tendency among PE investors to cash out early rather than waiting on possible valuation escalations in continuation funds. According to Bain, this trend possibly emerges from unsatisfactory returns over past periods, pushing investors into a cash-flow deficit on substantial PE portfolio allocations.
Observing these trends, August--which bills itself as an investor’s “partner to access the best companies and projects in the private assets space”--suspects that the allocation recalibration as a driving factor for the observed fundraising volatility in the private sector during the recent years.