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Trends: September 2001

The world stopped on 11 September as it heard about the terrorist attacks in the US, but after the initial shock wore off, the private equity industry started taking stock of how the tragedy would affect it…

Uncertainty reigns in aftermath of terror attacks
The private equity industry faces an uncertain future in the wake of the terrorist attacks on New York's World Trade Center. As the news of the atrocities began to sink in, private equity firms in the US and Europe turned their attention to how the consequences were going to affect them. The US and other main global economies were already teetering on the edge of recession even before the suicide missions, but now, most economists are predicting a bleaker picture - in the short-term at least.

Many venture capitalists in the US said investments in companies would slow down even more than they had already; others said the situation was so bad already that things couldn't get any worse (Wall Street Journal Europe 21.9.01). Matrix Partners general partner Tim Barrows said the aftermath would be affected by an overall lack of confidence ‘[This] makes people pessimistic about the future, and when they're pessimistic they tend to invest at a slower rate.' The National Venture Capital Association's Mark Heessen said that the increased difficulty involved in air travel would put many VCs off investing outside their local area. However, Ted Dintersmith at Charles River Ventures said that the pace of investing was so slow before, that the attacks would make little difference. ‘Our climate is so bad, it's not going to derail anything. Venture firms are doing a couple of deals a quarter and you can't get much slower than that.

Fundraising efforts are likely to be affected at both the deal and fund ends of investing, said EFinancial News (24.9.01). Goldman Sachs and Schroder Ventures have already used a break-off clause to halt an MBO deal for Cognis, citing the ‘market uncertainty after the tragic events in the US'. Even before the attacks, fundraising had been tough, but firms that have funds currently in the market, such as Doughty Hanson, Advent International and Close Brothers Private equity are going to find life exceptionally tough.

VCTs are likely to feel the impact of the uncertainty possibly more than other private equity vehicles. Artemis VCT warned that UK financial markets were likely to remain volatile until the full implications of the recent terrorist attacks on the US become clear and the outlook for the corporate sector is easier to read (AltAssets 26.9.01) The firm announced a 4.42 per cent fall in its net asset value per share since launch to 90.86 pence, outperforming the AIM market's 23.5 per cent drop over the same period. ‘The UK market is likely to remain volatile over the short term pending a clear outlook for global financial markets following the recent tragic events in the USA, as well as for UK corporate earnings and consumer spending patterns,' the firm said in its results statement.

The leveraged buy-out market is unlikely to escape unscathed, either. The Financial Times (20.9.01) said banks were already tightening lending and insisting on stricter terms. Oliver Tant, head of KPMG's private equity advisory arm, said that the attacks had already had ‘a quite substantial impact'. ‘The uncertainty itself creates nervousness, and we were already seeing (tighter credit terms) over the summer as concerns grew about the health of the economy,' he said.

A more upbeat view came from Pantheon International (Venturedome, 21.9.01). It said that fund raising would become more difficult, but added that company valuations were becoming cheaper to create a ‘particularly favourable' environment for firms with funds to invest. Meanwhile, Alchemy Partners ran an ad in the Financial Times (26.9.01), to remind the financial and business community that it is still open for business. ‘Our investment committee is not paralysed,' the ad ran. ‘Alchemy Partners remains open for investments.'

Technology investments dominate private equity 2000
Technology accounted for the lion's share of global private equity investments last year, according to a survey by 3i and PricewaterhouseCoopers. Global Private Equity 2001 found that technology investments made up 64 per cent of the US$177bn total investments by private equity firms across the globe in 2000. The figure for 1999 stood at just 36 per cent. Following the technology crash last year, many investors in private equity will be concerned about the high level of exposure funds had and still have to this risky sector. Of the total $113bn invested in technology-related companies across the world, US$85.4bn was invested in the US - an increase of a staggering 156 per cent on the figure for 1999. Technology investment in Western Europe reached US$13bn. The US$177bn total invested for the year represented a 30 per cent increase on 1999 and was the highest amount ever invested. However, with the global economic slowdown and increased caution on the part of private equity fund managers, this year is unlikely to be another record breaker in terms of total invested.
AltAssets 10.9.01