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Trends: February 2003

US VCs making new investments again, UK investors to increase private equity allocation, boost to buy-out levels expected…

Canadian private equity investment levels down 35 per cent year on year in 2002
The amount invested in Canadian companies by private equity firms slipped to C$2.5bn in 2002, down 35 per cent from the C$3.8bn invested in 2001. Although the annual figure made for disappointing reading, the most recent quarter showed some improvement. Investment activity in Q4 2002 was worth C$754m, a jump of 51 per cent on Q3. Communications and networking attracted 27 per cent of all investment, with life sciences second, attracting 19 per cent. While the value of US private equity investment into Canada decreased by 40 per cent in 2002, its share of total capital invested remained relatively constant at 26 per cent.
AltAssets 27.2.03

Fund of funds sector growth boom looks set to end with a bump
The unprecedented boom in the private equity fund of funds industry looks set to come to an abrupt end, with more than 40 per cent of present managers likely to disappear in the next few years, according to new research released by AltAssets. The report said the fund of funds population had yet to register the massive downturn in private equity fundraising more generally and a dramatic change in the fundamentals of the industry since 2000. The report argued that survival rested on a firm's ability both to access capital and to select the best funds. It described a variety of different approaches to each objective but found as many as 40 per cent of players lacked the requisite combination. The report identified 120 fund of funds managers globally, with the US accounting for the majority both in terms of number and their share of the $130bn managed by the sector as a whole. But it said that an increasing share of the industry was operating on a global basis - predominantly US and Europe - which was having a homogenising effect on the way it operated.
AltAssets 12.2.03

US venture-backed M&A value falls dramatically in 2002
Yet more bad news for US venture capitalists hoping for an upturn: the value of venture-backed mergers and acquisitions fell to $7.2bn for 300 transactions in 2002, compared to 336 transactions worth $17.1bn in 2001. Software remained the leading sector for venture-backed M&A in the fourth quarter of 2002, accounting for 43 per cent of deals and 40 per cent of the total quarter value. Telecommunications also made a relatively strong showing with seven deals valued at $172.9m, but there was a surge in healthcare M&A transactions, which accounted for 25 per cent of value for the quarter.
AltAssets 21.2.03

Buy-outs set to increase in 2003
UK private equity firms expect to see a significant increase in buy-out deal activity this year, compared with the low levels experienced in 2002, according to a survey by Deloitte & Touche. Two-thirds of respondents were anticipating an uplift in their investment levels in 2003 and 61 per cent believed they would see the increase in the next six months. They believe that most of the growth will come from the mid-market as vendors have started revising their price expectations downwards.
Financial News 24 February - 2 March 2003

European fundraising experiences 37 per cent slump year on year
Further evidence of the decline in private equity fundraising in 2002: just E24bn was raised for private equity investment in 2002, a 37 per cent fall from that recorded in 2002, and a 42 per cent fall from that raised in 2000, says Initiative Europe. Venture capital fundraising experienced a particularly serious decline. Funds raised to target venture capital opportunities accounted for just nine per cent of all capital secured in 2002, a fall of 22 per cent from 2001. Buy-out and generalist funds accounted for around 85 per cent of total funds raised, and Initiative Europe calculated that the average size of such a fund was around E650m.
AltAssets 13.2.03

European venture investment drops 58 per cent in 2002
Further evidence of the drastic slowdown suffered by the private equity industry in 2002: European venture-backed companies raised just E4.4bn in 2002, a 58 per cent fall from 2001 when venture investment in Europe totalled E10.5bn, according to new figures released by Ernst & Young and VentureOne. But the fourth quarter did provide some evidence of a mild upturn in activity. After five consecutive quarters of steady decline, E878m was invested in 223 transactions in Q4 2002, only one per cent behind the third quarter's total. In terms of stage allocations, 2002 saw just 35 per cent of venture investment going to seed and first-round companies, a significant drop from the 46 per cent allocation of 2001. In terms of geographical differentiation, the UK remained the strongest performer for European investment. UK companies gained some E1.5bn of the total venture investment in 2002, which amounted to more than that invested in France and Germany combined.
AltAssets 13.2.03

Spanish private equity investment falls more than 20 per cent in 2002
The Spanish private equity market, which has recently been attracting attention as one of the more interesting of the European markets, suffered a setback in 2002. Investment levels fell 22 per cent, bringing them to below E1bn for the first time since 1999, according to new research by the Spanish venture capital association (ASCRI). The research, conducted by José Martí Pellón, found that the first half of 2002 was the worst, with H2 investment levels 76.6 per cent higher than H1. ASCRI attributed the lack of activity to the aftermath of 11 September 2001, when the global economy slowed dramatically. The average investment fell from E3.3m in 2001 to E2.2m in 2002.But the number of funds' portfolio companies increased in 2002 by almost 20 per cent to 1,350.
AltAssets 26.2.03

VC firms looking at new investments again
Nearly half of the venture capital firms in Silicon Valley are to start making new investments, according to a survey by Deloitte & Touche. This is up from 36 per cent last year and follows a couple of years in which most VCs have focused on making follow-on investments in existing companies. Around 38 per cent of respondents said that they would deploy between a quarter and a half of their uncommitted capital to new deals. There was further cause for optimism in responses about the general economy. While the majority - 65 per cent - said they thought the economic environment was unlikely to improve this quarter, 82 per cent said they believed that the value of the Nasdaq would increase by up to 25 per cent by the end of 2003.
The Deal 27.2.03

US venture fundraising slumps more than 80 per cent in 2002
US venture capital fundraising remains in crisis as the amount raised in 2002 fell by 83 per cent on 2001 figures, according to new research released by Thomson Venture Economics and the National Venture Capital Association. Just 108 US venture funds raised $6.9bn last year, compared to 331 venture funds in 2001 raising $40.7bn. The fourth quarter was particularly barren for venture firms as 31 venture firms struggled to obtain $1.2bn. Further evidence of the continued decline of the venture capital industry in the US made itself felt in the number of funds reducing their fund size. Some 26 US venture capital firms announced the downsizing of their funds in 2002, with $5bn handed back to investors.
AltAssets 11.2.03

Continental European buy-out market value leaps to E38.7bn in 2002
The continuing slump in global financial markets seems not to have affected European private equity players, according to new figures from the Centre for Management Buy-Out Research, sponsored by Deloitte & Touche and Barclays Private Equity. Deals recorded last year within the buy-out sector totalled a record E38.7bn - 20 per cent higher than deal value recorded in 2001. Larger deals drove up the total valuations, with 60 per cent of the buy-out market value coming from just four per cent by number of deals worth more than E500m. In terms of country breakdown, the Germany buy-out market declined for the third year running, with just E5.8bn-worth of buy-out deals recorded there. France, on the other hand, reached a new record in terms of value with E13.8bn.
AltAssets 5.2.03

Finnish 2002 private equity investment grows 12 per cent on year
The continuing struggle for survival amongst private equity players may have softened slightly for those based in Finland. Investment levels increased by 12 per cent to E380m and Finnish private equity and venture capital firms raised E779m in 2002, almost double that raised in 2001. The majority of invested capital went to new portfolio companies, with E252m put into initial investments, representing 66 per cent of the total invested. The Finnish private equity industry had around E3bn under management at the end of 2002.
AltAssets 13.2.03

Average number of US investments expected to increase by 50 per cent over the next year
US mid-market private equity firms are looking to increase their investment pace substantially over the next 12 months, according to new research carried out by US-based M&A research firm RW Baird. The average number of investments that mid-market focused firms expect to make in 2003 is more than 50 per cent higher than the average number of investments made in 2002. Mid-market firms have the capital available to keep such promises, should the opportunities present themselves, the survey found. The average mid-market firm has only invested 38 per cent of its current fund. But despite such a positive outlook for 2003, the economic uncertainties and global political instability were reflected in the finding that almost 25 per cent of the 190 responses indicated that return expectations had lowered substantially. Mid-market firms have traditionally expected returns of upwards of 30 per cent; they now anticipate returning between 20 per cent and 30 per cent.
AltAssets 11.2.03

Pharma M&A deal value falls significantly in 2002
The slowdown in global capital markets was blamed for the drastic fall in total M&A pharma deal value in 2002 but private equity firms took advantage of weak markets to extend their influence across the sector, according to new figures released by PricewaterhouseCoopers. Excluding Pfizer's mega-deal, a $60bn merger with Pharmacia, total deal value in 2002 was just $11bn, compared to $61bn in 2001. Private equity firms were able to take advantage of the caution of investors more usually involved in the larger deals, backing two of the top ten deals in 2002. The larger of these two deals was the sale by Nordic Capital of Scandinavian Nycomed Pharma to a consortium led by CSFB Private Equity for a reported E1bn. PricewaterhouseCoopers pointed out that secondary buy-outs are increasing in number as the public markets remain entirely inaccessible to private companies, and trade buyers are busy tidying up their balance sheets.
AltAssets 5.2.03

40 per cent of UK institutional investors plan to increase allocations to private equity
UK institutional investors remain committed to private equity despite falling return expectations, according to new research from AltAssets for the British Venture Capital Association. Some 40 per cent of a representative sample of UK institutional investors said they expected to increase their allocation to the asset class over the next two years. The average among the 32 respondents will rise from around three per cent to four per cent over the period, the survey found. The respondents have an average annual net return on private equity of almost 20 per cent but expect returns to fall to around 13 per cent over the next few years in line with the general deterioration in financial and economic conditions.
AltAssets 24.2.03