The BVCA Report on Investment Activity 2001 has produced a mixed bag of findings which will give those involved in the asset class cause for cautious optimism.
On the downside, performance figures were at their lowest level for ten years, with venture capital funds suffering the biggest drop in performance –35.7 per cent year on year. On the whole, private equity funds recorded a one-year return of –7.1 per cent, which whilst disappointing, still represented a better return than those seen for UK pension funds (-9.1 per cent) and all other FTSE indices except the FTSE 250 (-6.7 per cent).
Evidence of a fall in investments did nothing to dissuade investors in the asset class, suggesting that investors are no longer basing their investment strategies on short-term measurements. UK private equity continues to enjoy strong performance rates, with three, five and ten year returns producing 13, 15.7 and 17.4 per cent respectively. 2001 saw private equity firms attract over £12bn in commitments, a 36 per cent increase on the total for 2000. Of the £12bn raised, 71 per cent is destined for MBO/MBI activity, with half of this figure directed towards very large MBOs.
The results did reveal that write-offs were at their highest level for five years with £826m written off investments in 2001. The value of the write-offs was more than seven times higher than in 2000 and accounted for a third of the divestments by British venture capital and buyout firms. The association considers both asset sales and write-offs as divestments.
However, at just under 1,600, UK private equity firms made a greater number of investments in 2001 than in 2000. The total amount invested by UK private equity firms fell by over £2bn to £6.16bn, a drop of 25 per cent. The average financing across all stages of investment fell to £3.9m from £5.4m in 2000.
The increased investment in private equity represents a vote of confidence for the industry. Foreign institutions were the biggest investors, contributing 71 per cent of the total funds raised in 2001, against 64 per cent in 2000. Keith Arundale, partner at PWC, which co-ordinated the research, said the results were a boost for private equity investment in the UK. “The level of investment from outside the UK shows that there is a lot of confidence in UK firms to produce strong returns on investments. UK investment in private equity funds is likely to grow as institutions, particularly pension funds, attempt to diversify their portfolios as a result of [the] Myners [report].”
High technology firms received the highest amount of private equity investment, with £1.7bn being invested across 690 companies. These figures represent just over a third of all investments made in 2001 and more than half of the investee companies for the same period.
Mark Drugan, investment manager at Westport Private Equity, said the results provided private equity firms with some grounds for optimism for the coming year. 'The results show that there is a lot of interest in UK private equity, not just from a buyout perspective, where we have seen large funds raised in 2001, but also in the technology and biotech sectors, which both saw an increase in investments.'