Region of optimism

The current environment is "reasonably manageable for the lower end of the market compared to 2001/02," according to Per Roman, partner of technology investment banking firm GP Bullhound, who started on a note of cautious optimism when talking to a group of venture professionals in the day's first break-out session.

His presentation aimed to decipher what the economy is telling us. What emerged was that the Scandinavian countries are the regions of milk and honey (and oil for some). Where unemployment is steadily increasing across Europe, the projections from the Nordics are still below average. Similarly, the region's consumers are leading the way, with low interest rates giving people more money to spend. The danger, of course, is that low interest rates coupled with various tax incentives simply has a doping effect on the economy, and the real effects of the crisis will be felt when policy-makers run out of instruments.

For the venture community, the arrows are pointing in various directions. As buyout funds continue to secure the lion's share of fund commitments, fundraising for European venture funds have halted. The VCs themselves remain cautious, with activity levels remaining low. The few deals that have completed, however, are bigger - suggesting investors are increasingly focusing on later early-stage opportunities. Consequently, Roman told the audience, pricing of series-A and series-B rounds are lower than in a decade.

The players that have remained active in the space, and in fact upped their efforts, are corporate investors, which have almost taken on the role of the VC. Could VCs be missing the boat? Possibly. But as Roman suggested: "Many vendors are still holding back their best assets."

The question on everyone's lips, though, was when will the exit markets open? Roman predicts the European venture space will look more like the US; with the biggest exits driving home the returns. He further said that the IPO market, which up until now has been virtually closed, is showing some signs of promise with an increase in the number of filings. He jokingly commented: "We need the stupid capital back in the market, - that's what generate returns."

Survival of the fittest

The following panel was chaired by Northzone Venture's Per-Jorgen Parsson and included Harry Briggs, an associate with London-based Balderton Capital; and Fergal Mullen, a general partner with Highland Capital Partners, all of whom joined Roman in a discussion on the venture outlook.

The meltdown of the financial system prompted doomsday prophecies with predictions of industry shake-outs in the buyout space. The venture industry had their shake-out in the early noughties, and as Mullen said, the current decrease in commitments to venture funds is partly due to a wind-down of the dotcom bubble.

Chances are some zombie funds remain. As Mullen said: "The barriers to exit in this industry, are even higher than the barriers to entry."

Buyout funds, the unlikely competitor

The pressure for quicker returns have led some VCs to take a closer look at so-called later early-stage investments. It is widely accepted it takes 10 years to build a company, so it is not surprising some look to more mature companies, with exit horizons of three to four years. Naturally, this also depends on the sector, with social networking, for example, allowing for shorter holding periods. Nonetheless, the danger is still the lack of financing in the earlier stages. Roman had a final word of advice to all VCs: "Don't throw away your early-stage experience." In other words, stick to your guns and continue to look for opportunities in start-ups. Indeed, as Briggs pointed out, Balderton's best home-runs have been in cases where they have entered as one of the first institutional investors.

Private equity - where next?

Stephen Sher, a managing director with Goldman Sachs' private equity division, brought the attention back to the buyout market. He predicted that although the current environment is very much defined by a "wait and see" approach, now is the time to source good deals. Sher foresees an increase in dealflow from restructurings "as denial turns into reality". He further noted that the senior debt market is not back in any scale, bringing new deals with more equity and also joint ventures. Goldman Sachs itself has over the past year invested in distressed debt, and he concluded that although they see good opportunities, they remain cautious.

In the following panel Kai Jordahl, a partner in CapMan's Oslo office; Altor partner Fredrik Stromholm; and Pantheon Venture's Rob Wright, joined Sher in a discussion on the short-term future of private equity.

Over the past year nearly every development, or lack thereof, has been linked to the debt markets. Are they now opening? Sher desribed the debt markets as "nervously open." Stromholm concurred, stating that although some large players are again open to lend, they remain selective. The Scandinavian relationship banking model has, however, contributed positively to the situation in the Nordic regions, where financing remained available for the best deals throughout the crisis.

So will private equity return to its old ways of the boom years? Hopefully not, was the view of the panel. Fund investor Wright expressed concern that the industry might move on too fast, and not learn the lessons offered from the past year. He mentioned "ridiculously short" holding periods as one example. Altor's Stroholm reassured him, predicting holding periods will go up. "Private equity is essentially an ownership model," Jordahl continued, arguing it represents a "superior governance" model.

Yet, despite the optimism and faith in the model, the shake-out prophecies are still looming. Jordahl predicts the next round of fundraising will be the biggest challenge.

Finally, moderator Caroline Sundewall asked the panel if private equity would benefit from more openness and interaction with the public. Altor's Stroholm stepped up to the plate, having commented on the de-regulation of the Swedish pharmacies, where Altor secured the largest clusters, in all the major broadsheets and news channels the very same day. Unsurprisingly, he said private equity should engage with the public, and convey the benefits of private equity.

Visit www.svca.se > Kalendrium to download speakers' presentations and read Rikke's reporting in full.

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