German pharmaceutical investments buckle European venture slump

It is not news that the private equity industry has seen a dramatic drop in overall activity, the technology industry having suffered the most. 2002 has been a difficult year for new investment and a hostile environment for exits. While many expected that things would not get any worse than they were in 2001, others adjusted their expectations and took a more realistic view. For an onlooker the final outcome could be one of extreme confusion. The optimists, however, showed a reaction of disappointment and bemusement that the market did not recover from the bursting of the technology bubble or at least flatten out. An in-depth analysis of this market is offered by the upcoming Venture Industry Report 2003 produced by Initiative Europe, providing details on each technology sub-sector, such as internet, software and biotechnology.

On one hand the pessimistic view of the trend was predicted to continue into 2002 after investors’ confidence had fallen as a result of declining stock markets, the FTSE 100 seeing a fall of 25% over the year; on top of that the mood was ominous regarding many markets, especially technology products and services.

Nevertheless, from an optimistic point of view one could argue that 2002 would seem like the perfect time to invest when valuations are down and the exit market is nonexistent. At worst they could reciprocate their counterparts in the buyout market, hold portfolio companies longer and provide multiple rounds of finance.

The venture capital market

2000 was a record year for the European private equity market in terms of both volume (2528) and value (EUR 93.5bn) of completed transactions, after having seen continual increases year-on-year since the early 1990s. However, after the record year, 2001 saw the number of European private equity transactions completed fall, recording a 28% drop in volume in comparison to the previous year. 2002, witnessed a further decrease of 33% in the number of completed transactions over that of 2001 and falling just below levels seen 1999.

Despite witnessing a decline in total deal volumes of 17% over the period 1999 to 2002, total deal value remained 16% higher (over the same time frame). Dissecting the market between technology and non-technology (rest of the market) allows us to see that the overall trend of the market was influenced primarily by the technology sectors.

The private equity technology market mirrors the trend seen in the FTSE Eurotop 100. Although the exact relationship between the two is not clear, the data represents almost a 1:1 correlation. The bursting of the technology bubble, the subsequent free-fall and widespread difficulties in the wider technology markets meant that confidence in the venture capital and quoted markets had been badly burned and as a result, both markets nose-dived from early 2000 onwards.

The downfall of the technology sector consequently led to a snowball effect on the rest of the market. The impact of the downturn in 2002 has had the greatest effect on the United Kingdom. Market share for the UK in 2002 is below figures seen for the 1999 to 2002 period. France, however, has been one of the few countries that has performed well, particularly on early-stage transactions.

Geographic overview

Over the period 1999 to 2002 some 1,753 European early stage technology transactions were completed, with a combined total deal value of EUR 10.56bn. During this period as a whole, the UK, France and Germany were the most active regions in terms of the volume of completed transactions; together the regions accounted for over 73% of all early-stage technology deals completed.

In terms of volume, the UK, France and Germany, continued to imprint their dominant position within the expansion technology market. The UK alone accounted for over a third of the completed deals seen between 1999 and 2002, with its nearest competitors having completed only half of that. A large proportion of expansion deals within the UK has been within the software sector of which the biggest has been the EUR 128m Asera transaction. Similarly, the UK also attracted by far the largest amount of capital, accounting for a third of the total value of the expansion technology market.

The completion of a large number of pharmaceutical transactions enabled Germany to become the second most active country in Europe. This sector accounted for 49% of all early-stage venture technology completed within Germany. The federal republic has also had a few success stories including the Cardion transaction, which received its fourth round of finance.

The Deutsche region (including Germany, Austria and Switzerland) was the third most active Continental European market in terms of new venture funds launched in 2002. In value terms the picture is slightly different. The UK continues to dominate the sector closely followed by Germany and France. Venture capitalists completed 445 expansion transactions in 2002 with a total value of over EUR 4.8bn. Germany, which had a market share of 14% of all expansion technology deals completed in Europe for 2002, is dominated by the pharmaceutical sector.

Biotechnology drives the German market

The biotechnology sector remains strong despite the downward trend of the venture technology industry, fuelled particularly by the UK and Germany. Demographic trends and lifestyle changes point towards an increasingly elderly population. According to United Nations projections, the global population is expected to rise to 9.3 billion by 2050, increasing by over 100% compared to current figures.

These potential revenues and other factors such as the reform of the healthcare system in Germany has meant that the pharmaceutical industry in particular has seen a sharp rise in interest within the venture capital industry, along with increase in demand for research into nano-technology, cancer, and stem cells.

Almost all the countries in Western Europe saw some sort of biotechnology activity. Germany, surprisingly, was the most active country with a total of 45 deals completed in 2002. Between 1999 and 2002, Germany accounted for 31% of all biotechnology deals completed within Europe, while the UK accounted for 30%. In value terms, it was the UK that saw a greater share of the market, seeing 29% of all funds invested into the area, while Germany accounted for 25% of total value within the European landscape.

This is an excerpt from the upcoming Venture Industry Report 2003 produced by Initiative Europe. The review provides an annual overview of venture capital activity in Europe and provides analysis of each technology sub-sector, such as internet, software and biotechnology, on the basis of validated statistical data collected by Initiative Europe since 1999. If you wish to learn more about this report or the other industry sectors covered please contact:

Juwel Aktaruzzaman, relationship manager, Email: juwel@initiative-europe.com. Tel: +44 1737 784 208.

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