UK data shows slowdown by private equity and venture capital firms in 2008

Private equity and venture capital investment by UK-based firms in 2008 fell below £20 billion for the first time since 2005, according to the British Venture Capital Association’s (BVCA) forthcoming Report on Investment Activity.

The preliminary data, collated and analysed by accountants PricewaterhouseCoopers, shows investment dropped to £19.5 billion in 2008 compared to £31.6 billion in 2007 and £21.8 billion in 2006.

The number of companies getting private equity or venture capital backing also fell, from 1,680 in 2007 to 1,571 in 2008. The BVCA says these preliminary figures reflect the worsening of credit conditions through 2008 and the onset of recession.

However, in comparison with the decade as a whole, rather than the exceptional 2006-2007 period, investment in 2008 was robust. The £19.5 billion invested in 2008 almost equalled the total for 2004 and 2005 combined which was £21.3 billion and exceeded that of 2001, 2002 and 2003 put together, at £18 billion.

The report also shows that early-stage investment in UK-based companies declined to £346 million, a £600 million drop from 2006, and a significant decline from the £434 million invested in 2007.  The number of companies financed fell from 502 in 2007 to 441 in 2008.

Commensurate with the decline in investment activity, divestments also fell off, from £13.6 billion in 2007 to £10.7 billion in 2008, with only 938 companies divested in 2008 compared to 1,469 in 2007. And in another sign of the times, a larger proportion of divestment in 2008 came from write-offs. Of all disposals, 204 worth £1.7 billion, or 16 per cent of the total, were write-offs, compared to 185 write-offs with a value of £0.9 billion in 2007.

Simon Walker, chief executive of the BVCA said private equity and venture capital firms are not immune to the effects of the recession and the decline in investment levels and fundraising is not unexpected.

“The stark decline in early-stage investments, though, is particularly worrying. There is a wealth of opportunity in the early-stage sector and we would like to see the government cornerstone a fund-of-funds which can invest in the best venture managers in order to take advantage of these opportunities and ensure that Britain does not bear witness to a lost generation of innovation,” said Walker.

“We are in for a period of uncertainty and continued difficulty, but by investing in ailing companies and saving jobs, backing the businesses of tomorrow and creating jobs, private equity and venture capital will be at the forefront of economic recovery.”