Early stage and late stage VC capital in UK declined in 2007
Despite the brave gloss put on by BVCA member firms’ activity that shows an underlying increase of more than one-third on VC investments, and despite the credit crunch in the second half of last year, the fact is that true venture capital investments in the UK declined by 44 percent. That is if you discount all the other measures like refinancing of bank debt and secondary purchases, as well as MBO/MBI activities which have been thrown in the same bucket by BVCA in its 2007-VC investment activity report published in conjunction with PricewaterhouseCoopers LLP. Despite the gloss and several attempts to fix the market failures in early stage venture capital market, the picture for early stage and technology venture capital in the UK remains bleak.
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The combined early stage and expansion stage (late stage) investments equalled £1,137m in 2007, a decline of 38 percent from the 2006 figure of £1,836m.
The biggest damage is in the start-up category, where the number of deals recorded in 2007 declined to 207 from 245 a year ago, whilst the total amount collapsed by 64 percent to £190m, from £531m in 2006. The Chilli believes that the 2005 figures were more credible when the figure for start-ups was £160m; in comparison to that, the £190m in 2007 looks quite healthy. In light of this 2006 was probably a statistical anomaly or a re-classification.
Early stage decline confirms market failure
Having said that, the total figure for early stage venture capital in the UK shows a massive decline. Total early stage amount declined to £434m, a 54 percent decline from the £946m recorded in 2006. The picture for number of deals is not that bright either: the total number of early stage deals in the UK remained flat at 502, from the 500 figure in 2006.
This is not good news for anyone, as the industry needs to hit the magic 5 percent for the overall figure, if it is to sustain itself. The 2007 figure currently stands at 4 percent, so 2008 should provide an excellent opportunity for the VC industry to correct this mis-direction.
Technology sectors
The total number of technology deals in 2007 was 527 compared to 517 in 2006. Communications was flat at 34 deals, gathering £203m – but this is a marked decline from £243m in 2006. The software sector leads the pack with £213m in 180 deals compared to £231m going into 196 deals in 2006. Web 2.0 deals gathered £27m in 33 deals, while semiconductors grew to £37m in 23 deals.
On average, technology deals averaged out at £1.58m, with early stage average being £740K. Medical instruments and Web 2.0 averaged at £500k, while semiconductor averaged £1.1m.
For late stage deals, the pharmacy sector had the highest average at £2.62m, semiconductors at £1.91m and computer hardware at £2.08m.
Expansion (late stage) VC declines further
Total investment in expansion deals rose from £6.6 billion in 2006 to £8.4 billion last year. However, if you stick to a strict expansion stage VC, and strip out the refinancing of bank debt and secondary purchases, true late stage VC actually declined by 38 percent to reach £1,137m in 2007, a massive decline from £1,836m in 2006.
LBO-MBI buyouts
Ashley Coups, director, PricewaterhouseCoopers LLP, added, “Buyout activity increasingly dominates the investment landscape. Management buyout and management buy-in deals attracted the greatest proportion of overseas investment - £14.8 billion or 75 percent of the total, up from £7.5 billion or 66 percent of the total in 2006.” In the UK, management buyouts and buy-ins are also the dominant force with £7.7 billion or 64 percent of the total assets devoted to these types of deals.
The Chilli believes that the 2007 LBO-MBI data were skewed by some large one-off deals, like the £11 billion LBO of Boots Alliance, which probably accounts for the vast majority of the £800m figure (the cash deposit) for East Midlands and probably reflect the down payment by the group of buyout funds. This picture, however, is not going to be repeated in 2008.
European deals size x6 higher
Total investment by BVCA member firms, which includes the vast majority of private equity and venture capital assets managed in the UK, but not all invested in the UK, was up from £21.9bn to £31.6bn – a 45 percent rise. But this partly reflected the increase in BVCA membership from 192 to 214 member firms during the year. Adjusting for this, the underlying increase was 37 percent.
Activity was split equally between the first and second half of the year and investments were made in 1680 companies in total, compared with 1630 in 2006 and 1535 in 2005. Investment in UK companies continued to increase last year, rising from £10bn in 2006 to £12bn in 2007. But the inclusion of new BVCA members, including several large buyout houses, has meant that investment in continental European companies increased at a faster rate – up from £10bn to £14bn last year.
Europe investment figures from UK VCs is now estimated at £14bn, which exceeds the UK’s £12bn; also, the average deal size in Europe is now £56 million compared to only £9m in the UK – this is a x6 multiple.
Simon Walker, CEO, BVCA, said, “The latest figures demonstrate that the UK is increasingly the gateway to the whole of Europe and the most important centre for the private equity industry outside the US. This reflects the depth of knowledge built up over decades, an attractive regulatory environment and unparalleled access to capital. It is essential that we preserve our advantages and that nothing is done to threaten the favourable regulatory environment.”
Regional asymmetry
Instead of directing the spread of VC investment across the whole of the UK, London absorbed £5,730m, or 48 percent of available venture capital, up from 42 percent in 2006. If one includes the surrounding region of South East England, the combined region absorbed £8,223m, or 69 percent of all the available VC. Other regions pale into insignificance were it not for some large MBO deals, like Boots Alliance, which brought forward the East Midlands region to the forefront, at £802m.
The next biggest territory was the North West, with 4 percent at £600m, piping past the Cambridge cluster which garnered £531m and is located in the Eastern England region. Wales, Northern Ireland, North East, South West and West Midlands all received less than 3 percent. Clearly, a new re-invigorated campaign to improve the image and communications for the regions is clearly desirable, if it is to attract and diversify the VC pool across the different regions.
Exits – not IPO
A total of £13.6 billion was divested in 2007. Sales to other private equity funds represented the largest exit category at 28 percent, followed by trade sale at 27 percent. Repayment of preference shares and loans represented another 20 percent of the exit values, and IPO flotation surprisingly only represented less than 3 percent.
Healthy pipeline for the future
On the fund-raising side, BVCA members raised £29.3 billion in independent funds in 2007 compared with the £34.3 billion raised in 2006 and £27.3 billion in 2005. UK investors were the second largest investors with £7.3 billion, to North America’s £12.2 billion.
The Chilli perspectives
The utility value of BVCA annual figures, released two quarters after year end, is becoming increasingly difficult to digest and compare with other major regions, whose data are released in the first quarter after year end. Additionally, the data for the high growth technology sectors and sub regions mixes up both true venture capital (that invests in leading edge high growth technology companies) with private equity, a label now quietly dropped from its lexicon, (which invests in trailing edge, relatively low growth companies, via MBO-MBI, financial restructuring, refinancing of bank debt and secondary purchases).
It may be more useful to release the two distinct sets of data and related activity totally separately, so the UK VCs (both early stage and late stage), planners and policy makers get a true picture of how the UK compares with the US, Israel, and now increasingly India and China.
Without reliable, transparent, timely figures, the UK could be heading into another dark alley, only to find out a few years later that it missed the boat because it held a totally different concept of what constitutes high risk VC investments compared to the rest of the world. More important than the data is the fact that the major policy rehaul cannot be effective unless the two distinct activities (that require separate policy and tax incentives) are kept separate, albeit managed from the same trade organisation.
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© Chilli Publishing Ltd 2008 |
02 JUl 2008 |
