VCs jump on economic doom bandwagon

According to the most recent of the firm’s private equity surveys, four out of five venture capitalists believe the economy will not improve in the coming months.

This represented a far more pessimistic outlook compared with three months ago when 55% of VCs said they expected the UK economy to decline. At the time, there was also a slight easing of recessionary fears.

But in the 2001 third quarter survey, almost half of VCs said they expected a decline in investee company performance, with less than one-in-ten anticipating an improvement.

The technology boom of 1999 brought VCs into the public eye with many pouring millions of pounds into ‘exciting’ dotcom and other hi-tech ventures. But things turn nasty when many of these new economy companies went belly up when the bottom fell out of the dotcom market in early 2000.

Since then confidence in investee companies has fallen consistently.

And the outlook for funding deals looks set to remain poor with two-thirds of VCs expecting volumes to remain low well into 2002. An anticipated decline in debt finance, considered integral to deal making in the venture capital market, has further dampened expectations.

Quintin Barry, a corporate finance partner at Deloittes, said most VCs were holding off deal activity until they saw a ‘low point’ in the cycle.

But, he added, the news was not completely bleak with ‘some houses actively investing, taking advantage of the reduced competition and more realistic prices’.

Furthermore, optimistic winds could soon be blowing across UK shores. A recent survey of US VCs by D&T revealed a slight upturn in sentiment.

For now though, the picture looks gloomy.

Adding to the D&T statistics, earlier this month the Office of National Statistics revealed that the UK manufacturing sector was in recession after growth fell for the second consecutive quarter and analysts Dun & Bradstreet said the number of corporate insolvencies would continue to rise until 2002.

And today, Japanese semiconductor giant Toshiba announced plans to slash 30,000 jobs worldwide on the back of a revised profit statement, adding to the thousands of jobs already slashed across Europe and the US.

Links

Manufacturing falls signal economic gloom

Economic warnings mount for Europe

Analysis: The brink of recession?