Nothing ventured nothing gained

Venture capitalists and private equity houses could be the white knights to salvage the economy, but transaction levels seem to be stuck in neutral.

Members of pro·manchester will today be asking why the VC floodgates have yet to open, at a discussion seminar sponsored by Ford Campbell and featuring a panel of experts from YFM, Lloyds Development Capital and Halliwells.

Despite the lack of competition from cheap credit, deal numbers in the city region are still relatively low and transactions are taking longer to complete. Manchester’s financial professionals will examine whether this is simply a matter of confidence, or whether deal levels are doomed to take a back seat until we achieve a return to economic growth.

Simon Cleaver, investment director from YFM, commented on the issue: “Equity funders have cash to invest, and in a downturn acquisition multiples tend to fall, so dealflow should be strong. In reality though, trading conditions, vendor confidence and the difficulty of raising debt are all making deals hard to do, so funders and advisers will increasingly have to work closely together to complete transactions.”

Added Chris Froggatt, partner at Ford Campbell: “Historically investors have obtained their best returns during economic recessions, as there is less competition for deals and asset values tend to be lower. However the private equity sector will only be able to significantly increase transaction volumes when the debt markets improve.”

Despite the fact the world is struggling with a recession, VCs are remarkably optimistic about their future funds. They are also increasingly looking to government as potential financial partners, given the impact of policy on their future success.

According to a global VC survey*, the majority of respondents saw government implementation of favourable tax policies as most significant, alongside increased government support for entrepreneurial activity, such as research grants, small business investment corporations and increased training programmes for entrepreneurs.

Paul Jefferson, corporate partner from Halliwells, commented on the market: "Equity investment has been a key catalyst to deal activity in the North West but it is unwilling or unable to deliver on its own. There has been talk of equity taking the strain in the short terms by structuring and pricing some risk as "quasi-debt" but the appetite is not there in practice, as the blended returns fall short of what those guys are used to delivering.”

Added Stuart Layzell, investment director at Lloyds Development Capital:
“Investing consistently throughout the business cycle is important to LDC as the most active investor in the UK middle market. We have already supported two North West based businesses in 2009 and would expect to invest in several more this year.”