Venture capital giants raise €19bn but what will they spend it on?

Charterhouse, Cinven and Permira find a huge investor appetite for their funds. But the big deals are elusive

Charterhouse Capital Partners is the latest private equity firm to close a massive new fund, highlighting the widening divide in Europe between a premiership of mega-funds and a minor league of smaller, often domestically focused groups.

The €4bn (£2.7bn) fund that Charterhouse raised, its largest ever, closed ahead of schedule and beyond its initial €3.5bn target, signalling the voracious appetite that institutions and pension funds continue to have for the asset class. Cinven should announce the close of a €5bn fund within days, while Permira expects to close its newest fund for up to €10bn by June, which would make it the largest ever in Europe.

Taken together, the €19bn that the trio are set to raise represents more than a third of the €49bn in buyout funds raised in all of Europe last year, according to research from Almeida Capital, a fund-raising adviser.

Big funds are raising more money in less time than ever before, according to Almeida, but it comes at a time when deals are getting harder and harder to do.

ITV last week saw off a £5bn bid approach by a private equity consortium, and recently both HMV and House of Fraser have also said no to offers. And the €7.5bn takeover of Dutch media group VNU, which would be one of the biggest ever in Europe, is also on the rocks as large institutional investors demand more money from the consortium of KKR, Blackstone, AlpInvest, Hellman & Friedman and Thomas H Lee Partners.

Public companies have become more and more attractive to the larger private equity firms, but after years when they were falling with relative ease to the buyers, the targets have become increasingly intransigent. Large institutional shareholders are demanding higher takeout prices before they say yes to offers. There is also more competition from strategic buyers, which have roared back to the market after several years of restructuring.

Mega-funds such as Blackstone and CVC say they are happy to have reached this new echelon of major public deals, where they say that competition from other firms remains light compared to the overcrowded middle market, which concentrates on sub-£500m companies. Indeed, they argue that bigger deals offer the prospect of better returns and lower risk, as larger companies are theoretically more stable and hold greater potential for value to be squeezed out of them.

But the numbers, at least so far this year, paint a different picture. Through the first three months of the year, just £3.1bn worth of buyouts were completed, according to the Centre for Management Buyout Research. Of that total, just four were public-to-private transactions, which is off the pace from the 20 that were done in 2005. Despite the nearly daily presence of private equity firms in the press, mentioned in connection to everything from BT to Vodafone, they have managed to close very few deals.

Indeed, the days of easy money look to have faded into the background. Investors recognise this and have ratcheted down their expectations. Said one investor in private equity firms: "There's no harm in getting back to the norm."

The norm is in the region of the high teens or low twenties per annum, rather than the 25 to 30 per cent returns that some firms have produced in the last generation of funds.

Even so, those lower expectations are still well beyond equity returns, which is why the sector, despite the brave new world in which it finds itself, continues to attract massive amounts of money.

Almeida expects the European private equity industry to raise a total of €56bn in 2006, a slight drop from the €60bn that was raised last year. Rather than a loss of investor appetite, however, the slight decrease is due more to the fund-raising cycle of major funds that brought in record amounts last year.