Help still there to move firms into bigger league

Sep 12 2007 by Iain Laing, The Journal

Will venture capitalists, and the investment they make in growing companies, be hit by bad publicity surrounding private equity investors? Iain Laing asks the experts.

FAT cat private equity investors are in the firing line for making obscene profits at the cost of jobs in some of the UK’s biggest companies.

The negative publicity has encouraged the Government to act but, although new Chancellor of the Exchequer Alistair Darling has stated there will be no knee-jerk reaction, industry insiders are worried that the good work of the UK’s venture capitalists will be hit in the crossfire.

Private equity and venture capitalists are very different beasts. Private equity firms look to buy big companies and break them up into parts and sell them for a profit. Venture capitalists on the other hand are taking big risks, often with their own money, to invest in small and growing businesses – and as such are critical for future UK growth.

Evidence comes in the sheer number of venture capital-backed companies currently operating in the UK. This month a UBS Wealth Management-sponsored report Funding Growth in a Changing World: The UBS UK Venture Backed Report 2007 shows there are 1,668 such businesses.

The report also shows that a staggering £1.4bn of institutional capital was invested in UK venture-backed companies in 2006, up 27% on 2005.

So what is happening on the ground and what impact will recent damning news headlines have on entrepreneurs and businesses looking for investment?

Chief executive of Tyneside’s NEL Fund Manager Barrie Hensby said: “There’s no shortage of quality businesses out there in the North-East looking to secure investment finance to fund their growth plans or bring new products to market.

“Although there is some evidence that many businesses with growth potential are prevented from raising the finance they need because they are not in a position to put a coherent investment proposition to potential investors, we would encourage any businesses looking for investment of up to £500,000 not to despair at the perceived lack of available funding in the region.”

Yet the UBS Wealth Management report is mildly cautious about where the trends are heading. Paddy Lewis, investment director at the wealth manager’s North-East office, said: “The first quarter of the year is historically a busy period for venture capital investment, but the report indicates that this has been relatively quiet in 2007, suggesting that this year we could see a total level of investment of just £1bn, similar to the 2003 level.

“Although not exactly a gold rush, £1bn remains a healthy amount and the difference this money is making to some of the UK’s small firms is critical – for many it is the difference between growing and stalling.”

While the UK compares well with EU equivalents, the UBS report notes that “the bulk of venture capital activity is in the United States whilst the emerging threats to US dominance come, not from Europe, but from Asia”.

The British Business Angel Association’s Anthony Clarke says the picture remains healthy for those firms looking for cash injections from venture capitalists.

“As always they need a good business, a good plan, they need to be able to present it well and have a good team of people on board,” he says.

“There are a range of funds and investors out there and it is important for those seeking finance to do their research and find the right people with whom to do business.”

So the money is out there and some regions of the UK, such as Scotland, are witnessing unprecedented venture capital investment. The fastest growing sector for investors, according to research from UBS, with investments up 91% by value from 2005 to 2006, was services and retail.

Investment in IT grew 42% between 2005 and 2006, while there is evidence of the emergence of a “mediatech” phenomenon in which communications, information technology and media are converging.

£1.4bn the amount of institutional capital invested in UK venture-backed companies in 2006

3i Group the top investor in 2006 by syndicated deal amount

USA the top country hosting investors in UK venture-backed companies outside the UK

1,668 the number of privately held venture-backed companies in the UK as of May 2007

30% the percentage of European venture capital invested in UK companies

China overtook the UK in venture capital investments in 2006

India will overtake the UK in venture capital investments by 2009 on current trends

Source: UBS Wealth Management commissioned research, Funding Growth in a Changing World: The UBS UK Venture Backed Report 2007, data provided by Library House.