Venture capital dealings at record low, but cause for optimism

09 September 2002

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Stuart Watson, head of Ernst and Young venture capital advisory group, said that the second quarter of 2002 has been the worst quarter he had seen for three years. The findings emerge from asurvey published by Ernst and Young and Survey One, and show that the UK venture capital market, which accounted for 30% of the amounts raised in Europe, was down 36% from the same quarter last year, a 40% decline from 2000. There was evidenceof a strong move away from early-stage deals towards deals involving more financially robust and proven businesses. The hardest hit sectors were information technology, retail and consumer products. However, the findings contradict a survey from Cinven which stated that UK private equity investment in mid-market deals was expected to rise in the coming months. Indeed, there is evidence of buoyant confidence among private equity practitioners: a Deloitte and Touche report suggests that venture capitalists are expecting an increase in deal activity over the next six months, with disposals of non-coresubsidiaries providing the biggest source of opportunities. According to the report, 47% of the VCs surveyed expect an increase in the volume of transactions, while only 5% anticipate a fall. However VCs are more pessimistic about prospects for the economy as a whole, with just 17% expecting an improvement in the economic climate. These findings appear to be substantiated by a 3i survey of confidence among venture-backed companies, conducted in July 2002, which found confidence fell at the sharpest rate for five years in the second quarter of 2002. Deloitte and Touche point out that the opposing deal activity and economy findings are consistent, indicating that VCs hope to capitalise on the tough economic conditions.