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Trends: November 2001

LPs defaulting on private equity commitments, European biotech attracting investment, US VCs in paralysis, Sweden top for innovation and industry potential, UK VCs suffer confidence crisis…

LPs defaulting on capital calls
In an illustration of how tough the high-tech investment market has become in recent months, US lawyers acting for private equity firms are now saying that some limited partners are failing to honour their commitments. One lawyer estimated that one in ten firms in the US have experienced problems with investors defaulting on paying private equity firms when asked to. Those defaulting have tended to be high net worth individuals who had made paper millions until the tech crash earlier this year and are now unable or unwilling to meet their obligations. So far, there have been no stories of institutions defaulting.
PrivateEquityCentral 2.11.01

US VC investment drops 23 per cent in third quarter
US venture capital investment slowed again in the third quarter to reinforce the mounting gloom across the sector. The amount invested fell to $6.5bn, down 23 per cent on the previous quarter and nearly 70 per cent on the same period last year, according to the latest PricewaterhouseCoopers MoneyTree Survey in partnership with VentureOne. The level of investment has fallen well below its peak in the first quarter of 2000, when a massive $26bn was ploughed into private businesses. But Tracy Lefteroff, a global managing partner at PwC, said 1999 and 2000 had been aberrational years and distorted meaningful comparison.
AltAssets 13.11.01

Germany sees investment levels plummet
Private equity and venture capital investment in Germany slumped by over a third in the third quarter of this year to E562m, according to figures compiled by the German VC association, the BVK. Almost half of this went into follow-on financing, demonstrating that German funds are preoccupied about existing portfolio companies to the detriment of finding new investments.
EFinancial News 9.11.01

European biotechs still attracting VC cash but IPO window may be closed for years
European biotech firms continued to attract a generous slice of private equity funding in the first half of this year despite the deterioration in the investment climate in recent months. At over E670m, it was down 27 per cent on the record-breaking second half of 2000 but still three times the amount raised in the same period last year, according to the latest Ernst & Young European biotech review. The report warned, however, that the exit routes for venture capital investors are still problematic and the IPO window that slammed shut so unceremoniously earlier this year may stay closed for some years.
AltAssets 19.11.01

Fall in European early-stage investment highlights VC caution
Early-stage venture capital investment in Europe has fallen 40 per cent in the first 10 months of this year compared with the same period a year ago, according to Tornado research. The uncertainty of the economic climate has bred a mood of caution and made VCs more inclined to invest in later stage investments, the report said. The average deal size across all sectors also fell, reflecting the slowdown in the industry and in capital markets in general. The findings echo developments in the US, where activity has been quicker to slow. The last couple of months have seen activity grind to a near halt as firms wait for some visibility on short-term macroeconomic prospects. Optimists predict an upturn in the first or second quarter of next year but others are less sanguine. They are worried public markets will take longer to recover, limiting short-term prospects for VC exits.
AltAssets 8.11.01

Valuations in US venture-backed companies slump further
Average pre-money valuations of US companies seeking venture capital funding fell yet again in the third quarter of this year, according to figures released by VentureOne. The average for Q3 stood at $15.4m, compared with a peak of $30.1m in Q1 2000. Fewer of those attempting to raise second-round financing from VCs actually managed it in the last quarter. Just nine per cent of companies eligible for second round funding completed; in Q4 1999, 22 per cent completed.
PrivateEquityOnline 13.11.01

American VCs suffer investment paralysis
As many as 52 per cent of VCs in Silicon Valley expect further deterioration of the economic climate over the coming six months, according to the latest Silicon Valley Private Equity Confidence Survey released by Deloitte & Touche this month. Graham Watson of Deloitte & Touche used the term ‘investment paralysis' to describe the current situation where, despite having funds available, VCs are reluctant to commit to investments due to economic uncertainty resulting from the terrorist attacks.
Venturedome 21.11.01

US venture-backed buy-outs hold steady in Q3
US venture-backed buy-out activity held steady in the third quarter despite the deteriorating conditions in financial markets and mounting macroeconomic uncertainty, according to the latest research from Venture Economics and the US National Venture Capital Association. There were 70 deals in the latest period, compared with 78 in the second quarter and 62 in the same quarter last year. The average value per deal was $74.6m, up from $61.3m in the previous quarter but well down on $175.3m in the same quarter last year. The dramatic fall in average deal size reflects the steep drop in valuations since public markets collapsed and the IPO exit route was slammed shut, said Jesse Reyes, vice president of Venture Economics.
AltAssets 8.11.01

FT/OECD report says Switzerland tops league for innovation and industry potential
Switzerland shows greater potential for strong industrial performance, innovation and entrepreneurship in the years ahead than anywhere else in the world, according to a league table produced by the Financial Times and based on research by the OECD. Sweden was in second place, followed by the US, Ireland and the Netherlands. The idea of the exercise was to rank countries according to their potential for economic growth over the medium term, based on their receptiveness to new technologies, the strength of their labour markets, productivity growth, and a host of other indicators. Venture capital firms have historically gravitated towards countries that show these sorts of qualities.
AltAssets 2.11.01

US technology companies adapt to fight terror
Technology companies, suffering from a corporate IT budget slashes, are changing their spots to take advantage of the need to protect against terrorism. For example, where once companies sold customer relationship software, they are adapting the technology and repackaging it for sale to government departments to help them track suspected terrorists. Others are jostling to sell their wares to airports or are homing in on the anthrax scare. ‘In a down economy, government is the best game in town,' said Barry Hurewitz, partner at law firm Hale and Dorr. ‘Government has been the biggest consumer of technology products and services for some time, but there's a new urgency [after September 11]. Government agencies need these products and services, and they need them quickly.' Watch out for a flurry of VC firms specialising in anti-terrorism technology.
Boston Globe 19.11.01

UK VC confidence at lowest ebb on record
UK venture capitalists are more downbeat than ever about the prospects for their investee companies, deal activity, and the availability of new funds, according to the latest Deloitte & Touche Private Equity Confidence Survey. The despair being felt by UK VCs is being felt equally, and sometimes more intensely, by their European counterparts. The real turning point in the current downtrend in optimism will not be reached until there are clear signs that the prospect for exits are improving.
AltAssets 26.11.01

Mezzanine financing on the up, says report
While all other markets appear to be slowing, mezzanine finance is experiencing an uplift, according to research carried out by European mezzanine provider Pricoa Capital Group. By the end of September this year, E3.1bn mezzanine capital had been invested in Europe; the total for the whole of last year was E3.6bn. Mezzanine's increasing popularity, especially in the mid-market buy-out sector, has been driven by a decline in high yield issuance over this year.
PrivateEquityOnline 12.11.01

BVCA report highlights positive contribution of private equity on UK economy
Private equity firms have made a strongly positive contribution to the UK economy, according to a report produced for the British Venture Capital Association by Bannock Consulting. The research starkly contradicts the historical reputation of private equity firms as being asset-strippers, only in the business for the short term. The BVCA has long been trying to improve the reputation of the industry and correct misapprehensions that still hang over from the 1980s about the ruthlessness of the industry. 
AltAssets 23.11.01

Israeli high-tech investments down still further…
Investments into Israeli high-tech companies have slumped in the third quarter of this year, showing a 66 per cent drop on the same period in 2000, according to figures released by venture research house IVC. Israel's high-tech companies raised $371m in Q3 this year, 28 per cent below even the second quarter's dismal results. The number of companies receiving capital decreased from 137 in the previous quarter to 117 in Q3. Investments from Israeli venture capitalists declined by 54 per cent on the third quarter of last year. But perhaps more tellingly, first-round financing by Israeli VCs accounted for just 28 per cent on the total invested, dropping from 52 per cent in Q2.
AltAssets 27.11.01