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Trends: October 2001

US and Europe report dismal private equity figures, Finland ranks top for future growth, US private equity executives see fall in wages…

October hasn't been a good month for US venture capital. A swathe of surveys of the last quarter confirmed fears of a dramatic slowdown in the industry over the last quarter. Much as the bad news had been expected, the sheer volume of downbeat surveys made depressing reading.

First up were figures from the National Venture Capital Association. At $7.7bn, venture capital investment fell 31 per cent in Q3 from the previous quarter and a staggering 73 per cent on the same period last year. This brought investment levels to their lowest since the first quarter of 1999. Still more depressing perhaps is the fact that the vast majority of money invested was channelled into existing portfolio companies. The figures showed that 81 per cent of all investment was follow-on financing. Fund-raising figures slowed over the quarter, too. The survey said that 46 funds raised a total of $6.2bn, a fall of 37 per cent on Q2 and a 78 per cent drop from the same period last year.

Preliminary statistics from VentureWire painted a less than positive picture, too. VC investments plummeted by 60 per cent in Q3 compared with the same quarter a year ago, according to its analysis. It said that only $29.2bn had been invested in private companies over the first nine months of the year, well short of the $76.9bn invested last year.

And another survey said that over 80 per cent of VCs felt that the current environment for funding was worse than a year ago. The finding will hardly come as a surprise, but it adds to the general feeling of pessimism permeating the industry. When asked the reasons for their gloominess, respondents cited the fact that they were having to spend so much time and money on their existing investments and a lack of exit opportunities.

However, a survey by Cambridge Associates provided a single weak glimmer of light. Its latest figures showed that private equity fund performance in the second quarter, while still poor, was an improvement on the first quarter. Venture capital funds recorded a net return of –6.6 per cent, compared with a return of –15.7 per cent the previous quarter. Private equity funds were at least positive, recording a net return of 2.3 per cent, up from –5.7 per cent on quarter one. And over the longer term, the report made rather brighter reading. The average three-year return on venture capital funds was 84.6 per cent, the five-year return was 55.7 per cent, and the ten-year 36.2 per cent. For private equity funds, the three-year figure was 8.2 per cent, five-year returns stood at 15.3 per cent and ten-year 16.8 per cent.

US private equity partners to take a pay cut
The giant pay gains enjoyed by private equity executives in the US last year are unlikely to be repeated this year or next, according to a survey by human resources consultants William M Mercer. Total compensation for many senior venture capital and private equity employees jumped more than 100 per cent last year, it said. The survey said managing general partners and CEOs enjoyed the biggest pay increases, with the average base pay rising 19.2 per cent to $538,000 from $451,300 and average total compensation (which includes annual incentive and carried interest value) rocketing 150.9 per cent to $7.7m. Mid-level partners and senior vice presidents saw a 130.5 per cent increase in total average total compensation to $1.2m. At the bottom of the private equity tree, analysts enjoyed an average increase of just 15.2 per cent to $75,300. The average whole economy pay increase in 2000 was 4.4 per cent, roughly in line with increases in each of the previous eight years.
AltAssets 25.10.01

Finland top of the world for innovation and growth
Finland has overtaken the US as the world's greatest potential for medium-term growth according to a report published by the World Economic Forum. The Growth Competitiveness Index is based on a variety economic figures, macroeconomic stability and technological advances. Finland has taken the top spot as a result of its measures to promote innovation through education, R&D and use of IT. The US came second, the UK slipped from eighth last year to twelfth and Ireland from fourth to eleventh.
Financial Times, 18.10.01

European VC investment suffering
Venture capital investment in communications and networking took a serious hit in the first six months of the year but the software and biopharmaceuticals sectors held up better in what is becoming an increasingly hostile investment climate, according to research from VentureOne. Total investment in communications dropped 56 per cent on the second half of 2000 to $972m. The number of investments held up better, dropping just ten per cent to 64, reflecting falling prices and smaller deals. The software sector, which ranks as the largest venture-backed industry in Europe, fared a little better. The total amount invested in the first half of the year was $1.4bn, a 15 per cent drop from the second half of last year. The number of deals dropped 19 per cent to 240 over the same period. The biopharmaceuticals sector also held up well in the first half of the year. The amount invested dropped 19 per cent from the second half of 2000 to $786m but the fall was exaggerated by an anomalously large figure for the fourth quarter of 2000. The number of deals fell 12 per cent to 68. Despite this apparent slowdown, VentureOne said investment in biopharmaceuticals is on an upward trend.
AltAssets 25.10.01

European private equity deals slump in Q3
The number and the value of European private equity deals slowed dramatically in the third quarter, according to research produced for the Wall Street Journal. It said that venture capitalists and buy-out firms invested just E12.1bn in the latest period, down from E24.1bn in the second quarter. There were 73 buy-out deals worth a total of E9.8bn, compared with 87 deals worth E20.6bn in the second quarter. Early-stage investment slowed even more dramatically. There were only 67 deals worth only E300m, compared with 117 deals worth E900m in the second quarter. The only sector to show a bit more resilience in the face of the global slowdown was the growth capital sector. There were 163 deals worth E2bn in the latest quarter, compared with 210 deals totalling E2.6bn in the second.
AltAssets 19.10.01

CDO investors in for bumpy ride
Investors in the fledgling European collateralised debt obligations market could well be hit by losses made following September's terrorist attacks in the US, according to rating agency Fitch. CDOs are more common in the US, but they have grown in poularity in Europe over recent years and some private equity firms, such as Duke Street have recently set up CDO funds to complement their other activities. US CDOs will take the hardest hit, said Fitch, following sharp declines in the value of tourism and airline shares. However, up to 25 per cent of a European CDO's exposure can be to US credits. They will also be affected by the general deterioration in European ratings and the rise in companies defaulting on debts.
eFinancial News 3.10.01

European private equity investment drops 17.4 per cent
European private equity investment in the first half of the year dropped 17.4 per cent, reflecting both deterioration in the investment climate and a fall in valuations, according to the EVCA mid-year survey. There was a marked decline in venture capital investment but a stronger performance in the buy-out sector. A total of E11.1bn was invested in 4,006 companies in the first half, compared with E13.5bn in 4,630 companies in the same period of 2000, according to the figures prepared for EVCA by PricewaterhouseCoopers. The number of investments fell 13.5 per cent.
AltAssets 18.10.01

UK buy-out market sees effects of 11 September
Conditions in the UK buy-out market are beginning to reflect the increasing uncertainty in financial markets, particularly since the terrorist attacks on the US, according to the latest research from Royal Bank Private Equity and Unquote UK Watch. Both the number and the value of deals in the £10m-plus buy-out market dipped significantly in September. Deal value fell to £21.3bn in the twelve months to the end of September, compared with a nine-year high of £23.5bn in late summer. The number of deals fell from a high of 155 in May and June to 132 in September. Price/earnings ratios also showed a declining trend and are now at levels not seen since 1996. They are currently at just below 11, compared with more than 12 or 13 for most of the past five years.
AltAssets 16.10.01
 
European buy-out market down in Q3
Not unexpectedly given the scale of uncertainty in financial markets in recent months, the European buy-out market fell sharply in the third quarter, according to figures from Initiative Europe. The value of buy-outs slumped to E9bn in the three months to the end of September from E20.6bn in the second quarter.The comparison between the two quarters possibly overstates the extent of the slowdown because of the unusual size of a handful of deals in the first part of the year. But there is no escaping the speed with which the market has taken a turn for the worse, something that has been greatly exacerbated by the 11 September terrorist attacks in the US.
AltAssets 15.10.01

UK buy-outs remain buoyant
The UK buy-out market appeared to defy prevailing market conditions in the third quarter by holding almost steady, according to the latest figures from KPMG. There were 99 transactions in the first nine months of the year with a cumulative value of £17.4bn, compared with 110 deals worth £16.4bn in the same period last year. KPMG said the market was still being driven by a few deals at the high value end. The top ten deals in the third quarter totalled £4bn, with the remaining 23 worth only £670m. But it cautioned that the bigger deals might be more difficult to finance in the months ahead because of tightening credit conditions.
AltAssets 11.10.01

LBO returns likely to be poor
A recent analysis of LBO portfolios by Mercer Management Consulting suggests that 50 to 60 per cent of private equity funds that invested heavily between 1998 and 2000 would have negative returns if currently marked to market. According to Neal Pomroy, a vice president at Mercer, private equity firms will need to invest more time in post-acquisition efforts to revitalise existing investments. He said funds that could add more value to their portfolio companies would enjoy superior returns.
AltAssets 9.10.01