Friday letter venture forth

After a record year for investing, venture firms are expecting to benefit from renewed enthusiasm from limited partners overweight in mega buyouts.  

You read it here first. In PEO’s holiday email to you all at the end of 2006 we predicted cleantech would be “the growth investment theme in private equity worldwide”.

We were spot on.

Life sciences and clean technology investments hit record levels in 2007. US venture capital firms invested $29.4 billion in 3,813 deals in 2007, marking the highest yearly investment total since 2001, according to the MoneyTree Report by PricewaterhouseCoopers using data from Thomson Financial.

The total invested in 2007 represents a 10.8 percent increase in dollars and a five percent increase in deal volume over 2006. Investments in the fourth quarter of 2007 totalled $7.0 billion in 963 deals, marking the fourth straight quarter with investments totalling more than $7 billion – a phenomenon not seen since 2001.

Much of the increase in investments over the prior year can be attributed to record investment levels in the clean technology, according to the report released last week.

The clean technology sector, which represented two of the five biggest deals of the year, experienced significant growth in 2007 with $2.2 billion invested in 202 deals. This investment level represents a 47 percent growth in dollars and a 58 percent growth in deal volume over 2006 when $1.5 billion was invested in 128 companies.

But clean tech was not the only positive story. Life sciences and internet investment also hit their stride, according to the MoneyTree.

And investment records aside, venture firms are also attracting more interest from limited partners. In its latest market intelligence report Partners Group, the Swiss alternative asset manager, said the last six months had confirmed its positive view of venture and growth opportunities.  The exit market had also improved for venture, distributions were good and it expected this to continue in 2008, the firm said.

Partners has always preached from the gospel of diversification, but investors overweight in mega buyout funds are turning once again to venture, according to anecdotal evidence.

And they are right to. In many respects the opportunity has never been better. Valuations are realistic. Venture firm managers say this has coincided with an infrastructure to support technology investment that means achieving a proof of concept and then scaling it is cheaper than ever. Capital can be deployed ever more efficiently in the march of technological progress.

That is not to say it is easy. There is of course the elephant in the room: venture returns, which still lag buyouts. According to State Street’s private equity index, which includes 1,381 funds representing $252 billion in commitments, buyout funds averaged 15.07 percent IRRs and venture capital funds 12.42 percent in the third quarter of 2007.

But there is an opportunity on both sides of the Atlantic for venture to win friends in the investor community. Especially while buyouts languish in the credit doldrums.