The Determinants of Private Equity Fundraising in Western Europe

Abstract

The aim of this paper is to identify the key factors that lie behind venture capital/private equity fundraising in countries where there is scarce and asymmetric information about final returns. Little empirical research has been done on this issue so far. Previous papers have considered variables like IPOs, GDP and market capitalisation growth, capital gains taxes, private pension funds and so on, as main determinants of fundraising activity. The main contribution of this paper is that it explains fundraising by means of variables directly related to the venture capital process rather than by variables related to the economic environment. We use panel data techniques on data from the European Union countries, excluding Luxembourg, plus Norway and Switzerland, during the nineties. In the light of the long period required for investing committed capital and the illiquid nature of investments until the fund is divested, the focus is placed on the fund manager's investing capabilities. We find that the amount invested has a statistically significant positive coefficient. This coefficient is even larger when the amounts considered are the ones in the previous year, which is consistent with the moment when the information is made available to the market. In this sense, the market would be regarding at fund manager's ability of investing the total amounts investors have previously committed. We also find that the amounts divested are important at determining fundraising, being this relationship now negative and larger again when we take into account divestments made in the previous year. This negative relation could be explained by the nature of the data, which includes divestments at cost, plus the negative performance in a substantial number of divestments in these countries at the beginning of the period analysed.