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Why VC matters
At a time when a UK car park business is bought by a buyout fund for over £820m or when it looks likely that Legrand will be sold off by Schneider Electric for around €5bn to a consortium of private equity firms (see the Deals pages of this issue), it seems pretty easy to forget the venture part of private equity. ?Go big or go home? seems a mantra many GPs (and their LPs) still subscribe to.

This is too simplistic a view, and seasoned private equity practitioners agree that venture investing plays a unique role in generating much more than acceptable (though maybe not startling) returns.

Two recent conversations proved a salutary reminder that venture investing should be cherished as a vital component of what private equity is all about. This is not intended to be a rallying cry for some woolly socio-economic philanthropy – just spend some time with some venture capitalists and you'll soon unwrap the wolf from such sheep's clothing. But now, when some are waving goodbye to VCs left stranded at no-exit station with a load of sick looking portfolio companies in tow, seems a good time to acknowledge the profound impact that venture investors have on people and their businesses.

As you'll find elsewhere in this issue Private Equity International had a long conversation with Rick Hayes, senior investment officer at mega-LP CalPERS. Although his institution deploys billions of dollars each year amongst the major buyout firms, Hayes was keen to emphasise CalPERS' long-term commitment to venture investing. The relationship with VC specialist investor Grove Street Advisors is testimony to this and is something that enables CalPERS to channel funds through a team of savvy venture-minded specialists to the right destinations. Hayes saw this investment process as an essential means of finding and nurturing the star GPs of tomorrow: the people whose fourth and fifth funds will have built on the success of that first, CalPERS-backed one.

The second conversation was with Richard Frank, CEO of emerging market private equity firm Darby Overseas Investments. Darby, founded by Nicholas Brady, the former Secretary of the US Treasury and creator of the eponymous Brady bonds, is growing a significant private equity business in both Latin America and Asia. Frank's background at the International Finance Corporation is probably one reason why he is particularly excited by a relatively small part of Darby's business: a specialised unit that provides technical, operational and strategic support for entrepreneurs based in venture hotspots in emerging markets. This unit also provides capital and is backed by a group of blue chip companies (including IBM) who see it as a great way to reach beyond their own corporate venturing activities into these venture hotspots.

These people were convinced that venture investing could deliver compelling returns – both in mature and emerging markets. And both saw that private capital had a vital role to play in invigorating an economy at both the macro and micro-level. So what's the problem?

The problem is that venture investing has yet to lose that morning after the night before pallor that is the legacy of the Internet boom and bust party. Many, and investors in particular, see VC investing as too risky, too illiquid and too long term. To these eyes, a buyout fund looks a much safer bet. And the contraction of the US VC market seems to validate this view. But don't assume this makes all VC markets the same. European VC for example is evolving in a different way, its diversity and fragmentation proving an advantage here.

Europe's VC Association was keen recently to remind its members of their roots by releasing the results of a survey that quizzed 364 European early stage and developing companies that had received venture capital funding between 1995 and 2001. 94.5 per cent of respondents said that venture capital had been an essential ingredient in their creation, survival or growth and 60 per cent of these said that, without the funding and support of their venture capitalists, they would not be in business today. Also, after the initial VC investment, an average of 46 new jobs were created by each of the 364 firms surveyed. Employees at all levels at these firms were reported to have achieved higher earnings too. As the EVCA noted, this survey comes after a year when €12bn was invested in 7,014 early and expansion stage companies at an average investment amount of €1.3m.

So venture investing is a good thing. It invigorates, vitalises and can help transform an economy. Just don't confuse it with buyout investing: it will not deliver the same returns nor will it deliver what it does in the same way.