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Trends: May 2003

European institutions under-allocated to private equity, UK private equity firms regain confidence, China offers best opportunities in Asia, say private equity professionals, UK corporates to increase venturing activity, investors hopeful of upturn in exits…

Venture investing in Canada falls to seven-year low
Venture Capital investment in Canada fell to a seven-year low in the first quarter of 2003. Geo-political uncertainty and the SARS outbreak have been blamed for the dramatic slide in venture activity. The value of venture investments in Canada fell to $305m from $754m in the fourth quarter of 2002. This dramatic decline follows a 51 per cent leap in the fourth quarter of last year according to figures released by the Canadian Venture Capital Association and Toronto-based Macdonald & Associates. The most significant decline was in the size of the average deal, which has plummeted to $1.4m in the first quarter of 2003 from $2.9m in the fourth quarter of last year, $3.6m for the whole of 2002 and $5.1m in 2001.
AltAssets 22.5.03

Institutions should invest more in private equity, study says
European institutions are under-allocated to private equity, according to a recent study by Standard Life Investments. The report, conducted by investment strategist Ken Forman, found that the optimal level of allocation to private equity could be as much as 20 per cent. The average allocation for European institutions is 3.6 per cent, according to the recent Goldman Sachs/Frank Russell report. The Standard Life study said that investors still viewed private equity as a high-risk asset class because of the poor performance of high technology venture capital funds. In fact, it says, buy-out firms invest in more established, and therefore less risky, businesses and will continue to outperform other types of investment.
Real Deals 8.5.03

Outlook brightens for UK private equity industry
UK private equity firms are confident that the worst of the downturn is over. A renewed sense of optimism should drive venture deal activity in the coming months according to Deloitte & Touche's latest private equity confidence survey. Approximately 25 per cent of those surveyed expected the economic climate to improve in the next six months, with just 13 per cent expecting conditions to deteriorate further. Increased confidence is expected to make deal pricing easier, which is expected, in turn, to boost transaction activity. Some 66 per cent of respondents said they anticipated an increase in deal volume over the next six months. Group subsidiary sell-offs are expected to provide the most significant source of transactions, followed by secondary buy-outs, according to those surveyed.
AltAssets 27.5.03

European institutional investors predict increase in private equity exits
European institutional investors have predicted a significant increase in private equity exit activity over the next six months, according to a report by business advisor RSM Robson Rhodes. The exit poll reveals that 50 per cent of institutional investors believe the number of private equity exits will increase despite tough market conditions. In addition, 79 per cent of respondents expect to see an increase in secondary buy-outs with 65 per cent believing that an increase in secondary buy-outs is a good thing for institutional investors.
AltAssets 27.5.03

VC investment in European biotechs remains robust but belies a less rosy reality
The European biotech market attracted the third-highest amount of venture capital investment ever in 2002 despite the sector contracting for the first time in a decade, according to Ernst & Young's annual European biotech report, Endurance. Europe's biotechs raised a mere E123m on the public equity markets last year, compared with E5.5bn at its peak in 2000. In contrast venture capitalists invested E1.1bn in 2002, accounting for 25 per cent of all venture capital investment and closely following software as the most popular sector. But much of the venture capital investment was channelled into later-stage propositions, which had been planning to float but were forced to delay their plans. The report estimates that 50 European biotech firms are planning to launch an IPO when market conditions improve. Significantly, the proportion of cash being invested in start-ups has fallen dramatically from 70 per cent of total funding in 2000 to just 35 per cent last year.
AltAssets 8.5.03

Venture capitalists do not improve performance, say academics
Venture capitalists who sit on the boards of early-stage companies have no positive impact on performance, two US academics have found. In a study of 400 US early-stage companies, James Hayton of Utah State University and Shaker Zahra of Babson College, found that those with venture capitalists on their boards showed mixed financial performance, a good rate of return on assets in more developed companies and on equity for start-ups. But they were unable to find evidence that VCs had any other significant impact on the companies they backed.
Real Deals 8.5.03

UK private equity industry not spared the gloom in 2002
The UK private equity industry proved unable to escape the gloom experienced almost universally in 2002, according to the latest figures released by the British Venture Capital Association. Fundraising conditions in particular have been tough for private equity firms with the annual value raised plummeting to £7.8bn last year, down 43 per cent from an all time high of £13.6bn in 2001. Worldwide investment by UK private equity firms fell 11 per cent in 2002 to £5.5bn from £6.2bn the previous year. The average financing across all stages fell slightly to £3.7m from £3.9m. The number of companies financed at the start-up stage dropped 13 per cent to165 from 190 in 2001, and the value of investment in early-stage companies fell 14 per cent to £196m from £227m. Expansion stage investment fell by 17 per cent. Management buy-outs presented a solitary ray of hope with a six per cent increase in investment, from £2.5bn in 2001 to £2.7bn last year. This gives an average MBO financing of £17.7m, compared to £12.5m in 2001. A lack of viable exit opportunities continued to present problems for private equity firms with the number of realisations falling by 24 per cent. Write-offs were the most common form of exit accounting for 28 per cent of divestments, followed by trade sales at 22 per cent.
AltAssets 19.5.03

US Q1 venture fundraising slumps to lowest level since first quarter of 1994
US venture capital fundraising continued its downward spiral in the first quarter this year to record its lowest net total since 1994. Some 22 funds raised $996m but the net total was just $604m once fund reductions were taken into account, according to the National Venture Capital Association. The fourth quarter of last year saw 42 venture firms raise a total of $1.7bn, down from $2.5bn in the previous quarter but still a lot stronger than the latest period. The NVCA said more than 70 per cent of the number of funds raised in the first quarter were follow-on funds, reflecting the additional difficulty being experienced by first time funds. There were, however, a handful of successful new firms, such as Quaker BioVentures and Lumina Ventures.
AltAssets 7.5.03

UK corporates to increase their venturing activities
Over a third of UK corporates are to devote more attention to corporate venturing over the next three years, research by Mori has found. The survey of directors of the UK's 600 largest companies found that those that already have corporate venturing arms are most keen on increasing their activity. As many as 60 per cent expressed an interest in doing so. It also found that the majority - 58 per cent - enter corporate venturing primarily for financial gain. The study was commissioned by Greenhouse Ventures and Corporate Venturing UK and will come as a surprise to many: corporates have received a fair amount of flak from venture capitalists over recent years for having abandoned their venturing activities when the bubble burst.
Real Deals 22.5.03

New regulations breed cautious optimism for China's private equity market
The majority of private equity and venture capital investors in Asia Pacific believe China offers the best investment opportunities in the region, according to PricewaterhouseCoopers' Show us the Money survey. But most will wait to see what impact China's recent regulatory overhaul has before setting up funds in the market. Regulations covering foreign participation in private equity funds were initially enacted in August 2001, but were revised in March this year. Private equity firms have welcomed the changes but do not expect their impact to be immediate. Of the surveyed respondents 60 per cent of private equity and venture capital investors considered China to be the most attractive market in Asia-Pacific. But 77 per cent indicated that they did not intend to start a fund in china in the near future.
AltAssets 16.5.03

European venture investment plummets in established regions but resilient in emergent markets
Venture capital investment plummeted in all major European markets in the first quarter of 2003 but emergent markets proved more resilient to depressive global conditions, according to new figures released by Ernst & Young and VentureOne. The four largest European markets, Germany, France, UK and the Nordic region accounted for just 78 per cent of venture investment in Europe in the first quarter of this year, a dramatic drop from 92 per cent in the previous quarter. Conversely, the smaller and less developed venture capital markets of Belgium, the Czech Republic and Ireland all saw the value of investments rise on the previous quarter. Total European venture investment plummeted from E1bn in the fourth quarter of
2002 to E639m in the first quarter of this year. UK venture investment suffered a particularly poor quarter with a 48 per cent decrease in investment from E365m to E191m.
AltAssets 14.7.03

US pensions and endowments up allocations to alternatives
US pension funds and endowments have increased their allocations to alternatives over the last year in an attempt to offset losses they have incurred on their equity investments, a recent report has found. The annual study by Greenwich Associates says that while alternatives still count for only a small proportion of their portfolios, at 7.5 per cent on average, many pensions and endowments had shifted part of their allocations from public equities and into alternatives, such as hedge funds and private equity. The survey found that 40 per cent of all funds invest in private equity, while as much as 60 per cent of endowments and foundations allocate to the asset class. The future looks good for alternatives, too, as 20 per cent of respondents said they were likely to make further shifts in their favour.
PrivateEquityCentral 6.5.03

European privately owned firms still losing confidence in economic environment
The business confidence of European privately owned companies has continued to fall in the latest quarter, according to the latest 3i European barometer index. Five out of the six surveyed regions demonstrated increasing economic pessimism with the solitary exception of a marginal upturn in Germany. The survey shows the lowest levels of optimism about the economic climate throughout Europe since the barometer was launched in 1998. The most significant fall-offs in confidence occurred in Spain and France, while Nordic countries remained the most upbeat. UK economic confidence dropped for the fourth consecutive quarter and varied markedly between regions. The index rose slightly in the South but decreased sharply in the North and the Midlands.
AltAssets 15.5.03

Israeli venture investment enjoys slight upturn but long-term trend still plummeting
Israeli venture activity displayed some signs of improvement in the first quarter of 2003 but investment levels are still well below those recorded in the same period last year, according to new figures released by the Israel Venture Capital Research Centre. So far this year Israeli high-tech companies have raised $211m from domestic and international venture investors, up slightly from $205m raised in the fourth quarter of 2002. But this is still 44 per cent below the $376m raised in the first quarter of last year. Of the 86 companies that received venture funding, 37 attracted more than $1m. Of these, six companies raised between $5m and $10m and seven companies raised in excess of $10m. The average financing round per company was $2.45m, six per cent above the average round in the previous quarter.
AltAssets 5.5.03

German institutional investors to increase private equity allocation
German institutional investors are planning to almost double their private equity allocations, according to a study carried out at the Fachochscule Wiesbaden in conjunction with Swiss fund of funds Adveq.German insurance companies and pension funds are forecasting an increase in their private equity allocation from 1.2 per cent to 2.2 per cent. The projected rise follows reported average yearly private equity returns of 12.5 per cent. This falls well short of historical highs in the private equity industry, but it compares favourably with struggling public markets.
AltAssets 15.5.03