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London (pts011/05.03.2003/10:01) - Figures released recently by Ernst & Young and VentureOne reveal that European venture capital investment fell by 58% in 2002 to 4.4bn euros, 79% lower than the 20.6bn euros raised in 2000. Deal flow also dropped by 49% over the year. However investment in Q4 2002 remained relatively flat, with 877m euros invested in 223 transactions, down only fractionally on the previous quarter of 883m euros.
Stuart Watson, head of Ernst & Young's Venture Capital Advisory Group in London, explains, "To put these figures into perspective, what we are seeing in venture capital activity across Europe is a return to normality after the extraordinary events of 1999 and 2000 in some countries, and a probable overreaction in others. VCs with a pan European reach will be looking for bargains in those countries which have fallen furthest. 2001 and 2002 have both been years in which venture capitalists have been concentrating hard on sorting out their existing portfolios.
"4.4 billion euros has been invested in nearly 1,200 venture capital transactions across Europe this year, which by any standards is still a significant amount of money. The adjustments the market has experienced in the last two years will deliver some interesting deals in 2003. We are already seeing a more active consideration by VCs of new investment opportunities".
The reduction in the amount of invested money and the challenges facing the venture capital industry has been reflected throughout Europe. Despite a slight pick up at the end of the year Germany experienced a painful 70% decrease in investment levels from 1.9 billion euros in 2001 to 575m euros in 2002 and a 53% fall in deal activity. France showed a fall of more than 50% to 731m euros and a 45% decrease in level activity (380 deals in 2001 to 209 in 2002). Sweden was down 68% to 364m euros, and Ireland illustrated a similar negative story, down 49% from 378m euros to 193m euros. The Netherlands reported deals of 113m euros in 2002, 10% of the value of 2000.
Although the UK VC market more than halved again in 2002 from 3.2bn to 1.5bn euros (2000 figure 7.1bn euros) it remains the largest VC market in Europe accounting for 34% of the total amount of funds invested. There were 288 deals reported in the UK in 2002 with the Software and Biopharmaceuticals sectors dominating the market with 51% of overall investment.
One of the bright spots in the European VC market in 2002 was healthcare investing, which was largely ignored during the boom and which constituted 33% of 2002 investment, up from 21% in 2001. Although investment in healthcare companies declined from 2.2 billion euros in 2001 to Eur1.5 billion euros in 2002, that 35% drop seems negligible beside the 63% decline in the amount invested in IT companies.
Healthcare's relatively good fortune continued in the fourth quarter of 2002, with investment rising 33%, to 385 million euros. The vast majority of cash was devoted to the biopharmaceutical sector with 1.1 billion euros invested in the year.
Despite the dramatic decline in activity in the IT sector the software industry still (just) remains the most important area for VC activity throughout Europe, accounting for 27% of investment, worth 1.2 billion euros, although the size of the deals was on average far lower than the healthcare sector.
Stuart Watson adds, "Looking ahead we are going to see some interesting activity in the IT industry particularly around wireless technology companies. 2003 will see only a modest shift in allocation towards seed and first round companies, as VCs will concentrate on looking for attractive valuations in later stage companies, as long as they can see an exit route over the next few years. There is still a 'wall of money' and the larger VCs are under pressure to put their funds to work."
Steve Harmston, VentureOne Director of European Research, commented: "The substantial decline in investment into young innovative unlisted firms by venture capitalists in 2002 is part of the wider post-bubble shake-out in capital markets. Those firms that raised small first-time funds in the late 1990s and early 2000 lost heavily in the Internet-led investment boom and now face significant challenges. Pension funds and other institutional investors are unwilling to provide them with new funds to invest, and they can't exit existing investments."
For more information please contact:
Eve Titchener, Ernst & Young
020 7951 0868 or 07855 488667 etitchener@uk.ey.com
Will White, Ernst & Young
0207 951 3264 wwhite@uk.ey.com
Steve Harmston, VentureOne
020 7405 7555, sharmston@ventureone.com
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