Talk to a random selection of venture capitalists these days and chances are they’ll tell you they’re just back from Europe, where they were raising money or introducing their firms. Not that such trips are entirely new. Firms from Apax Partners to Walden International have had international connections since they were founded. What is new is the importance of foreign money to the U.S. private equity market and the increased amount of time that U.S. firms are spending trying to secure foreign investments. The percentage share of U.S. venture capital funding raised from non-U.S. investors doubled between 1999 and 2002.
The industry is in the midst of a sea change in which non-U.S. institutional investors are increasing their participation in U.S. private equity, most of them for the first time. This is encouraging news for the many venture capital firms planning to raise follow-on funds over the next several years, since many institutional sources of capital in the United States have scaled back on their private equity allocations. “It’s a good thing [foreign interest has increased],” says Roger McNamee, co-founder and general partner of Integral Capital Partners, a VC and private equity firm, and buyout shop Silver Lake Partners, both based in Menlo Park, Calif. “U.S. private equity firms are fully penetrated into U.S. institutional investors.”
There has not been a windfall of new capital from overseas. In fact, the actual amount of foreign investment in U.S. private equity has fallen, roughly in tandem with the decline in U.S. institutional investments in U.S. private equity. However, the 30-plus sources interviewed for this story agree that non-U.S. capital will play an increasingly important role in the U.S. private equity market. A UBS Warburg/Mercer report predicts that the amount of new investments in private equity from European institutions alone will total about $450 billion by 2006. To put that into perspective, U.S. private equity funds raised $50 billion last year, including $9.8 billion from non-U.S. investors, according to Venture Economics and the National Venture Capital Association.
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