Pessimism grows among UK VCs

Rising concern in the UK private equity community over the performance of small business investments could lead to a shortage of funding next year.

Rising concern in the UK private equity community over the performance of small business investments could lead to a shortage of funding next year.

According to the latest Deloitte & Touche Private Equity Confidence Survey, 57 per cent of the 770 venture capitalists surveyed expected the performance of small companies to deteriorate over the next six months, compared with 45 per cent for the pervious quarter.

The deterioration is anticipated because the current economic downturn is likely to continue and exits will become more difficult, said the majority of VCs. As few as one per cent of those polled believed economic conditions would improve over the next six months.

Similarly 79 per cent of the VCs questioned expected debt finance to become harder to raise and 81 per cent expected raising private equity funds to become more difficult.

Quintin Barry, a corporate finance partner at Deloitte & Touche, said pessimism was to be expected in the aftermath of the terrorist attacks in New York. According to the Centre for Management Buyout Research, September and October recorded a sharp fall in deal activity, with about as half as many buyouts compared to the same period a year earlier.

Deloitte & Touche found that only 6 per cent of the VCs participating in the poll expected to be net sellers of businesses over the next six months, while 79 per cent expected to be net buyers. “In the current M&A environment with pressure on pricing, the VCs are unlikely to sell, unless forced, in what is mostly definitely a buyers’ market,” said Barry.

However nearly all the VCs believed restructuring activity by UK companies would create investment opportunities, 20 per cent said those investments would rise in the next six months.

There won’t be any spending sprees just yet, but where transactions are going ahead, at reduced multiples and on depressed earnings, there are opportunities for those VCs willing to open their cheque books to pick up bargains, said Barry. “There are vast sums of money in UK private equity funds and they don’t plan to be giving them back to providers,” he said.