VCs predict 2004 ‘product frenzy’

Corporate financiers now have official reason for optimism this year after a survey by Deloitte found that venture capitalists are predicting a ‘deal frenzy’ in 2004.

Research by the firm in the first quarter of the year has discovered that VCs’ confidence is at its highest level for five years. The study points to leisure and financial services as the areas that could see the most deal activity, along with the traditional safe bets of healthcare and support services.

Deloitte found that 82% of VCs believe that the number of deals will increase over the next six months.

Mark Picitti, private equity partner at Deloitte, said: ‘VCs’ confidence reflects the improved economic climate, with corporates resuming their mergers and acquisitions strategies bringing more businesses to the market.

‘Improved economic conditions also mean increased valuations, as the financial performance of target companies improves and the price aspirations of vendors rise.’

However, the rush to snap up deals may push up prices, according to the survey, as trade buyers return to the market looking for opportunities.

Fortunately, low spending by VCs during the recent downturn in corporate finance activity has left them with plenty of financial firepower to compete.

Competition for deals could well be behind the expectation of 52% of those questioned that the average deal size is likely to increase over the next six months. This means VCs going for higher risk deals.

The holding period of an investment is also expected to increase. The usual period is three to four years, but Deloitte’s research showed VCs expect that to increase to four to five years.

Of those polled, 43% believed the average life cycle would lengthen to fall in the four to five-year bracket. Only 7% of VCs thought that exits could be achieved in less than three years, while 11% expected realisation after more than five years.

In the coming year, leisure looks to be the hot sector in which to invest.

In 2003, it was the sector that saw most private equity activity, though support services got the backing of 22% of those polled, and healthcare 19%. The next most preferred was financial services at 15% and leisure at 12%.

Leisure has also seen recent megadeals such as the £1.3bn Gala tertiary buyout and the £2.5bn S&N Retail transaction.

‘The leisure sector proved the most valuable part of the buyout market last year, responsible for many of the megadeals and it seems that more VCs want a share of this action. The budget sector of the hotel industry, which is more resilient to falls in international travel, is also proving popular,’ he said.

Related reading

PwC office 2