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Buy-out funds are on the increase Back  
Andrew Doyle says that the recent Green Property and Smurfit transactions are representative of a growing trend towards buy-outs.
There is no doubt that Irish and international venture funds have plenty of money to spend. From 1999 to 2001, members of The Irish Venture Capital Association raised just short of e600 million (see IVCA report on venture capital activity in Ireland, produced by Matheson Ormsby Prentice). Internationally, the picture is the same. So, what is the venture capital industry doing with these monies?
To answer this question, one must distinguish between the ICT sectors, which have in recent years received the lion’s share of investment from the domestic venture capital industry, and other industries. It is also important to draw a distinction between early stage and development capital funding on the one hand and buyout transactions on the other.

Quality projects
Clearly, in tandem with the economic downturn, there has been a reduction in private equity investment activity. Venture funds certainly seem to be adopting a more cautious approach when reviewing the risk profile of prospective investments. More time is being taken in financial and legal due diligence and a management team which has succeeded once (or more often) before, is less likely to encounter difficulties in the fund raising process. Whilst this was undoubtedly always the case, in a down-market these distinctions are accentuated. Investors are more keenly focused on quality, in all its facets.
This is particularly notable in the ICT sectors, where there has been a diminution in level of activity. Nevertheless, high quality companies with a proven technology and business strategy are attracting significant interest from Irish and overseas venture funds, albeit those valuations are inevitably under significant pressure given the state of the capital markets.
None of this is, of course, surprising. Given the downturn in the ICT sectors, venture funds have been focused on helping existing investee companies re-organise and re-structure to reflect the new realities. This was certainly our experience throughout 2001. Since then, however, there have been signs that the ICT focused venture funds have substantially completed this process and are now increasingly active in concluding new investments.
In the buy-out market, matters are somewhat different. Given that, of its nature, a buyout will typically involve an established business (which is more than likely profitable) with a proven management team, this is hardly surprising when compared to early stage technology companies (where the risk profile is, to generalise, more often than not, different). Domestic and international buy-out funds are very active in seeking out good opportunities. The only surprise is that a greater number of transactions have not occurred in the last twelve to twenty-four months. In particular, the depressed state of the capital markets has long since given rise to speculation of a glut of public to private transactions. Having said that, the trend is very much in that direction, given the Smurfit and Green transactions.

Supply of capital
The availability of funds to Irish and international private equity houses would seem to auger well, in the medium term, for quality projects or businesses seeking capital.
There is another trend, which is likely also to assist in this regard - globalisation. In recent years, not only have US legal and commercial usages in the private equity market transferred to Europe; so have US venture funds. Many of the leading US players have established presences in London and elsewhere in Europe.
Those who do not, have developed strong links with Irish corporate finance houses so that, where a suitable investment opportunity arises, it is likely to find its way to the desk of the most suitable investor.

Changes in project demands
The global economic slowdown and comparative reduction in private equity activity has had significant consequences for the timing and logistics attendant upon the completion of a private equity financing transaction. Investors are taking significantly longer in carrying out due diligence exercises, whether in the commercial, financial or legal spheres. The investee company is not in the same position to debate valuations as was the case a couple of years ago. In addition (and importantly) US liquidation preference and anti-dilution structures have transposed to the European market in a way that simply was not the case two or three years ago. It is now almost inevitable, in a development capital transaction, to find that strong investor protections of this kind will be a pre-requisite.

The future
A proven management team with a quality business or project will receive significant interest from Irish and international venture funds. In particular, buyout funds are looking keenly for well-priced acquisitions. As a proportion of overall M&A activity, buyout transactions are on the increase. This is likely to continue for the foreseeable future.

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