Looming energy crisis reveals opportunities for VC investors
Preqin, the global leader in alternative assets data, tools, and insights, has published the Alternatives in Europe 2022 report.
European private markets have grown substantially over the years, with investors allocating significant capital to funds focused on the region to access private capital opportunities.
The total assets under management (AUM) of private capital funds focused on Europe stood at €2.2tn at the end of December 2021, according to Preqin Pro, the company’s database and analytics tool.
Q2 2022 hedge fund letters, conferences and more
To put this into perspective, in December 2015, the industry’s AUM was around €1.3tn, almost doubling in the last 7 years.
Now, Preqin analysts predict that by the end of 2026, private capital AUM in Europe is forecast to reach €4.9tn, delivering a 14% compound annual growth rate (CAGR) in AUM since 2021.
Crisis Creates Opportunity For Venture Capital
The strong performance of private capital assets following the global financial crisis (GFC) has brought many new investors to these markets. What’s more, the COVID-19 crisis created new opportunities in Europe, with the sharp V-shaped rebound helping existing investments in older vintages and pushing performance numbers noticeably higher.
In the European alternatives industry, declining interest rates throughout the pandemic pushed equity valuations to historically high levels.
The positive impact on private equity and venture capital (VC) internal rate of returns (IRRs) was significant, with the one-year horizon IRR of Europe-focused VC funds to December 2021 reaching +43%.
However, more recently, while venture capital fundraising has held up, private equity fundraising to the end of June 2022 was only €34bn raised, against €136bn across 2021.
UK Loses Ground To Luxembourg
Looking at historical AUM data, until recently, the United Kingdom (UK) dominated European alternatives AUM across all asset classes, but at the end of 2020, Western Europe* overtook the UK in terms of AUM in all private capital asset classes apart from private debt and, more broadly, hedge funds.
As Western European AUM growth now outstrips the UK’s, fund domicile data shows the UK has also lost ground to Luxembourg, particularly since 2017. In 2010, the UK and Luxembourg hosted 41% and 15% of Europe-focused funds capital, respectively, but by 2021, this has reversed to 16% and 46%.
Europe Must Diversify Its Energy Assets To Reduce Reliance On Russia
As Europe finds itself in an energy crisis, governments and the European Central Bank are scrambling to prepare for a harsh winter while inflation reins in real incomes.
The importance of alternative models in helping to re-balance supply chains will become clear, as private capital continues to play a central role in delivering the energy transition toward independence from Russian oil and gas.
Alex Murray, VP, Research Insights at Preqin says: “As alternative asset classes continue to grow and embed within global capital markets, their role in Europe is of increasing importance to the delivery of economic growth and resilience against mounting challenges.
As the continent is gripped by an escalating energy crisis, the longer-term path towards energy independence will be walked with private capital at the center of the energy transition.”
Murray continues: “Our forecast suggests infrastructure AUM will overtake real estate in the region before 2026. Even amidst the worsening economic backdrop with persistent inflation and rising rates, private capital offers investors avenues to diversify their risk exposes.
For example, direct lending funds in the region will be benefitting from the variable rate structures used there as the ECB tightens policy rates to tame inflation.”
Key Alternatives In Europe 2022 Facts
- AUM: The total AUM of private capital based in Europe stood at €2.2tn at the end of December 2021 according to Preqin Pro. By the end of 2026, private capital AUM in Europe is forecast to reach €4.94tn, delivering a 14% CAGR in AUM from 2021.
- Infrastructure and private debt lead the pack: Asset class forecasts in Europe suggest that infrastructure and private debt are set to experience the strongest growth in overall AUM between 2021 and 2026. Their respective CAGRs are 24% and 19%.
- Luxembourg pulls ahead: In 2010 the UK and Luxembourg provided domiciliary hosting of 41% and 15% of Europe focused funds capital respectively. By 2021, this has reversed to 16% and 46%.
- The Nordics: The region’s record high of €27bn annual fundraising in 2021 has plunged to just €5bn as of June 2022.
Asset Class Breakdown
- Private equity: Private equity is forecast to remain by far the largest asset class in 2026 reaching €2.1tn, to make up 43% of private capital in Europe.
- Venture capital: The one-year horizon IRR of Europe-focused venture capital funds to December 2021 reached +43%.
- Private debt: Actual allocations for private debt have effectively caught up their targets since Q2 2015, reducing the gap from 3.6% of assets under management (AUM) to just 1.7% in 2022, while actual allocations stand at 3.3% of AUM.
- Real estate: The asset class has remained the central target across alternatives. The latest funds in market data for Europe suggests real estate maintains a higher level of aggregate capital targeted (€101bn) in June 2022 compared to infrastructure (€77bn). However, Preqin’s forecast suggests infrastructure AUM will overtake real estate around 2025.
- Infrastructure: Infrastructure has experienced a marked uptick globally, although the bulk of that is intended for deployment in North America. Natural resources has seen the largest overall increase in median target allocations, from 0% in 2015 to 3% in 2022, with European investors quickly bringing this asset class up to 2.3% of actual allocations this year.
- Natural resources: The asset class has seen the largest overall increase in median target allocations, from 0% in 2015 to 3% in 2022, with European investors quickly bringing this asset class up to 2.3% of actual allocations this year.
- Hedge funds: Recently Europe-based hedge fund AUMs have taken a hit, down 9% from Q4 2021 driven by a -6.4% net return at Q2 2022.
* Western Europe includes: Alderney, Andorra, Austria, Belgium, France, Germany, Gibraltar, Guernsey, Ireland, Isle of Man, Italy, Jersey, Liechtenstein, Luxembourg, Malta, Monaco, Netherlands, Portugal, San Marino, Spain, Switzerland.
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