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Trends: April 2003

European VC investment levels stabilising, US VC investment still retrenching, Italy sees record year for buy-outs, UK private equity firms still cautious…

Latest figures show US private equity returns still suffering
US private equity returns are still mired deeply in negative territory with little sign of a significant turnaround on the horizon. The latest figures from Venture Economics and the National Venture Capital Association showed the eighth consecutive quarter of sub-zero annual returns. The figures for the quarter ending December 31 2002 showed a marginal improvement in buy-out returns on the preceding quarter but a continuing deterioration in venture returns. One-year returns for all private equity funds measured negative 11 per cent in the latest period, compared with negative 12.3 per cent in the preceding quarter. Venture returns worsened to an annual negative 23.3 per cent from 22.3 per cent, while buy-out returns edged up to negative 5.5 per cent from negative 8.2 per cent. All sectors of the asset class with the exception of mezzanine funds also showed negative three-year returns, highlighting the depth of the ongoing downturn. Longer-term returns are also beginning to pale although Venture Economics said private equity's long-term performance continues to outstrip other asset classes.
AltAssets 23.4.03

US venture firms scale back investment in start-ups
US venture capitalists are continuing to scale back their investments in start-up companies across the board. VentureWire figures for the first quarter of this year showed 329 financings worth a total of $3.4bn compared with 482 financings worth $4.9bn in the fourth quarter of 2002. Mirroring the slow down in investment, venture capital fundraising has also been thin. Only nine venture funds closed in the first quarter of this year, with combined commitments totalling $1bn. This represents a fall from the last quarter of 2002 when 15 funds raised $3.4bn. Biotech start-ups raised $563m through 36 deals this quarter, including ten investments of over $30m. Although the most active sector by far it could not withstand the prevailing trend, falling well short of the $773m raised by 62 biotech companies in the previous quarter.
AltAssets 3.4.03

European venture capital investment now stable, says report
Levels of investment by venture capital firms in Europe appear to have stabilised after a period of significant decline, according to a new report by Ernst & Young. Opportunity for the Brave says that investment currently stands at around E1bn a quarter. It identifies wireless, data security, biopharmaceuticals and internet-related companies as being particularly attractive to venture capitalists.
Real Deals 24.4.03

Private equity fundraising continues downward slide in first quarter of 2003
Global private equity fundraising continued its precipitous slide in the first quarter of the year. A total of 21 funds held a final close with combined commitments of E7.2bn, compared with 38 funds closing on E14.7bn in the first quarter of 2002, according to new figures published by AltAssets. A total of nine European funds closed with commitments worth E2.1bn. A single buy-out fund accounted for 32 per cent of total funds raised. Four venture funds raised 19 percent, two fund of funds raised 16 per cent and one mezzanine fund raised 23 percent of total capital commitments. A total of 12 North American funds closed with combined commitments of E5.1bn. There were six venture funds, four buy-out funds, one generalist and one fund of funds. The buy-out funds accounted for 71 per cent of the total, the venture funds for 17 per cent, the generalist 11 per cent and the fund of funds about one per cent. In addition to final closes, there were 15 interim fund closes totalling in the region of E1.9bn. European funds actually outstripped their US counterparts, accounting for eight of those closed and E1.2bn of the commitments.
AltAssets 7.4.03

Italy sees record in buy-out activity in 2002 while early-stage declines
Italian buy-out activity reached record levels in 2002 both by value and number of deals, while seed and early-stage investments witnessed a steep decline, according to figures just released by the Italian private equity association AIFI. Buy-out deals worth E1.6bn accounted for a record 59 per cent of Italy's private equity activity in 2002. By contrast, the value of capital invested in seed and start up deals fell dramatically from E291m in 2001 to just E65m last year. Italian private equity investments totalled E2.6bn in 2002, representing a 20 per cent increase on the previous year. But the number of deals carried out fell from 489 deals in 2001 to 301 deals in 2002. The Italian manufacturing sector, consumer goods and industrial products and services benefited most from the increase in private equity investment. But technology firms saw a steep decline in investment activity with a 56 per cent fall in the number of deals taking place and a 69 per cent fall in the value of those transactions. Exits were down on the previous year. Italy saw 143 exits worth a total of E589m in 2002, a decrease of four per cent and 35 per cent respectively on 2001 figures. In contrast to many other markets, Italy's fundraising activity rose in 2002. The total amount raised was E2bn, a six per cent increase from 2001.
AltAssets 15.4.03

UK pension schemes warming to private equity but many still unconvinced
Many UK pension schemes are taking private equity investment increasingly seriously, but a significant number remain unconvinced and are reluctant to take the risk, according to a survey by JP Morgan Fleming Asset Management. The survey showed that 44 per cent of the largest 350 UK pension schemes are currently investing an average of 4.4 per cent of funds in private equity. Out of the balance of 56 per cent, some 16 per cent said they had previously invested but are no longer doing so. Of those currently investing in private equity, 38 per cent predicted increasing their allocation to the asset class and 43 per cent said it would remain the same. By inference 19 per cent of pension funds currently investing plan to reduce their allocation to private equity. According to the survey, 80 per cent of pension schemes investing in private equity were happy with returns on their investments.
AltAssets 1.4.03

World events hit US venture capital hard in 2003; investment slowest for five years
Geopolitical uncertainty has hit the US venture capital industry hard in 2003 with quarterly investment levels dropping below $4bn for the first time in five years, according to the Ernst & Young/Venture One Venture Capital Survey. Just $3.4bn was invested in 404 deals in the first quarter of 2003, a decline of 21 per cent and 12 per cent respectively. The average value of an investment fell from $6.6m in the fourth quarter of 2002 to $6m so far this year, reflecting increased risk aversion in the industry and softening valuations. Whilst most sectors saw declines in investment levels some isolated IT segments actually saw significant increases in investor activity. Information services experienced a 70 per cent jump in the first quarter to $188m. Investment in semiconductors increased by 38 per cent and was bolstered by the quarter's largest deal, a $52m later financing round completed by Matrix Semiconductor.
AltAssets 28.4.03

Israeli VC funds raise net negative $128m in 2002, highlighting squeeze on funds
The squeeze on Israeli venture capital funds is growing tighter and will seriously damage local technology companies looking for finance this year, according to new figures from IVC Research. The amount of capital handed back to investors actually outpaced funds raised in 2002 to produce a net negative inflow of $128m. Israeli firms raised $1.35bn in 2001 and a record $3.33bn in 2000. But they managed just $63m in 2002 and handed back another $191m. The situation may be particularly damaging for early-stage technology companies because at least half of the $1.5bn that IVC estimates is currently available for investment is earmarked for follow-on financings.
AltAssets 1.4.03

New BVCA survey finds confidence among UK private equity firms fragile
Tough fundraising conditions have badly bruised confidence among UK private equity firms but many of them still expect to increase their investment activity over the next few months, according to a new quarterly survey of its members published today by the British Venture Capital Association (BVCA). The survey found that 85 per cent of respondents, who together represented more than a third of the BVCA's 170 member companies, thought fundraising conditions over the last three months had been unfavourable or very unfavourable. Some 13 per cent expected it to get worse over the next three months, outnumbering the five per cent who predicted an improvement. Unsettled macroeconomic conditions, ongoing uncertainty in financial markets, and the conflict in the Middle East are all taking their toll on private equity fundraisers. The same factors had made for a miserable operating environment for private equity firms, the survey said. A net balance of 39 per cent of respondents said the overall business climate had been unfavourable over the last three months. An equal share of firms expected improvement and deterioration over the next three months.
AltAssets 4.4.03

UK mid-market buy-outs grow in Q1, partially offsetting fall in larger deals
A jump in the number of mid-market buy-outs helped to partially offset a big fall in the value of larger deals in the first quarter, according to new figures from the Centre for Management Buy-Out Research. The total value of MBOs fell to £3.1bn in the first quarter from £4bn in the fourth quarter of last year but the number of deals increased. There were only two mega deals worth more than £100m compared with six in the previous quarter. The Gala Clubs buy-out was worth £1.3bn and the FosRoc £101m. Mid-market activity, however, was busier than at any time since 1999. There were 37 deals in the range of £10m-£100m worth a total of £1.4bn, compared with 29 deals worth £800m in the fourth quarter of 2002. Elsewhere, the CMBOR figures provided less comfort, particularly with regard to exit conditions. There were no IPOs in the first quarter and just seven trade sales. There were 153 trade sales in 2002 as a whole.
AltAssets 1.4.03