|
|
|
|
 |
|
|
     |
 |
FOCUS: Buyout Shops, Venture Capitalists Converge On Tech Cos
Private equity firms and venture capitalists have traditionally been very different investors - one buying up large profitable assets using lots of debt, the other investing only small slugs of cash in young companies before they make any money. Now the two are meeting head-on as the dramatic change in financial circumstances forces buyout firms to shift down a notch while early stage venture capitalists hunt for less risky, more-mature assets. One key battlefield is the technology sector, where the number of companies with significant revenue streams is increasing and the industry is being seen as a defensive play compared with other markets. The competition is driving up prices and making it more difficult to make a profit later on exit as both private equity investors and venture capitalists seek maximum returns on larger lumps of equity. "VC and PE business models are converging, which is likely to give rise to a range of new issues," said Simon Walker, U.K. head of venture capital at the Taylor Wessing law firm "Both industries will need to get comfortable with different transaction structures, management incentives and levels of control as they learn to compete with each other in a much more crowded market," he added. The data show that there is an increasing amount of capital going toward late-stage investment - some 42% of funds raised so far this year, compared with 31% in 2008, according to Preqin. And as the money raised by buyout funds has dropped dramatically, the buyout players are joining the stampede to raise money for late-stage venture-capital investment, rather than waiting until to invest when these companies are mature, operational businesses. U.S. Carlyle Group is an example of a private equity firm doing just this, having recently raised a EUR530 million fund to invest in European technology companies, making investments of EUR20 million to EUR60 million in small- and mid-cap buyouts as well as expansion capital. Just last month, the fund made a 15-pence-a-share, GBP100 million, approach to Innovation Group PLC (TIG.LN), an outsourcing and software provider for insurers. Talks were called off a few weeks ago but followed earlier approaches from more established midmarket players, reportedly including HgCapital, and specialist technology investor Silver Lake Partners. Citigroup (C) also closed a large-growth capital fund, raising $4 billion in the second half of last year to invest in fast-growing companies in sectors including technology, telecommunications and pharmaceuticals. Meanwhile, venture capital funds that have historically invested in early stage or startup companies are now moving toward late-stage deals, as these businesses are perceived to be much less of a risk, even though a greater capital investment may be required. London-based Amadeus Capital, a well-established venture capital investor, recently completed its first "mini-buyout," investing in a profitable company rather than investing in multiple rounds of financing for a company before it even has a cash flow - the classic VC model. It has invested 100 million Swedish kronor ($12 million) in equity and a further SEK100 million in Stockholm-based Episerver, a Web-content management system that allows nontechnical Web users to publish information on a Web site quickly and easily without any knowledge of how to create Web pages. "It's our first leveraged deal ever and the first one where we bought a stake in the company, in this case 40%, rather than just injecting cash to cover cash flow before a company became profitable," said Jeppe Zink, a partner at Amadeus Capital. Zink said the trend is being driven by the sheer number of good high-growth companies out there, even as the competition is driving up investment sizes and sale prices. Other traditional venture capitalists are also moving into larger late-stage deals often as part of a balanced fund strategy on the basis that it is better to have different investments with different risk profiles rather than just doing all early stage, high-risk deals. For example, Index Ventures, after investing in European startups for 13 years, launched its first-ever growth fund in January. The EUR400 million fund will focus on later-stage deals, mainly in the technology and life-science sectors. Index Ventures will keep investing in early stage deals out of its other funds. London- and Silicon Valley-based Kennet, another venture capitalist, has moved away altogether from early stage deals and its latest fund will invest only in later-stage deals in technology companies. Meanwhile, private equityfunds that were happily making money investing in established companies and using leverage - from five to 10 times earnings - are now having to look for returns with more upfront cash invested in high-growth companies, Zink said. In the process, traditional buyout firms are becoming new competitors, he said, adding that venture capitalist Amadeus Capital is just about to close another deal in Scandinavia in which it fended off private equity players. The competition has boosted the amount paid in mergers and acquisitions. Last year, some EUR4 billion was raised from just over 130 European transactions, compared with EUR5.7 billion from some 260 deals in 2006, the average transaction value rising to EUR30.7 million from EUR21.9 million, according to data from Dow Jones Financial Information Services. Taylor Wessing's Walker said there is scope for private equity and venture-capital funds to work together as well as to compete with each other. "From a venture-capital perspective, there is an increased appetite for late-stage growth investments and a potential shortage of available (venture capital) partners to join in," Walker said. "And for private equity, with acquisition finance harder to find, working with VCs offers the ability to spread risk through syndication and take advantage of the increasing number of technology companies with significant revenue streams," he added. London-based GMT Communications Partners, which typically invests up to EUR500 million in media and communications companies, demonstrates the point. "We were recently looking at a digital media business together with a well-known venture capitalist where the equity check would have been between EUR50 million to EUR75 million," GMT managing partner Tim Green said. The venture-capital fund concerned has historically been the first investor in a business, often backing it with as little as $1 million or even less. "The challenges to startup and early stage investment are much greater now and it makes sense for the VCs to focus more on the post-cash flow companies," Green said. |
 |
|
Copyright 2008 Granite Hall Partners, Inc. All rights reserved. |
|