UK Venture Capitalists Still Confident, Survey Shows

by Philip Morton, Investors Offshore.com

29 May 2007

According to the results of a survey published last week by Grant Thornton Corporate Finance, for the third consecutive year, confidence among mid-market private equity investors is riding high.

Since 2004, Grant Thornton's quarterly Mid-Market Barometer survey has taken a snapshot of the industry, and has found that it remains in impressive shape.

In the most recent survey, 84% of the UK's mid-market VCs predicted that the volume of transactions would increase or stay the same over the forthcoming year, while 82% anticipated that the value of transactions would follow suit.

Almost half (41%) of the private equity investors questioned said that new investments would be their biggest priority for the rest of 2007, while nearly a quarter (22%) commented that exits would represent their main focus. Value creation within their portfolio (17%) and seeking re-finance opportunities (7%) also featured on private equity investors' list of priorities.

Mat Bhagrath, partner at Grant Thornton Corporate Finance, observed that:

"The desire for new investments remains high and a steady increase in the number of VC funds and the value these funds possess is creating a climate of intense competition."

According to the survey, business services were cited as the most popular sectors for VCs to invest in over the coming year by 23% of the sample, healthcare by 14%, and financial services also by 14% of those questioned.

Within the healthcare sector in particular, the survey revealed an upbeat outlook for businesses involved in the manufacturing of medical devices, with 44% of respondents pointing to forthcoming investments in this area. Leisure and computing (10% and 9% of the sample respectively) were also expected to be desirable choices among investors.

Bhagrath added:

"It comes as no surprise that business services, financial services and leisure retain their appeal as sound investment choices. Business services and financial services have long been investment staples among VCs, due to a track record of delivering consistently good returns. VCs will also be buoyed by the strong levels of consumer spending benefiting the leisure sector."

"Expansion in the healthcare sector has slowed marginally compared to the same period last year. There has been particular growth in the appeal of businesses involved in the manufacturing of medical devices, brought about by the proliferation of cosmetic surgery, and more treatable medical conditions, this against a backdrop of continued NHS spending."

Asked about what VCs regarded as the biggest threats to deal making for the remainder of the year, over a third (34%) cited competition from trade buyers as the main competitive factor, followed by micro or macro economic developments affecting the market. Competition from foreign buyers (10%) was also seen as an issue growing in relevance.

"Looking ahead, major economic issues aside, the most significant challenge VCs are likely to face is strong competition from trade buyers. These have been noticeably active over recent months and will seek to grow their businesses by making targeted acquisitions, giving private equity houses a run for their money, " Bhagrath concluded.

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