Published in the Member Directory 2002
The Venture Capital and Private Equity industry expanded substantially during the last years of the 1990s. The subsequent decline on the financial markets resulted in more caution among the investors. In this article Tom Berggren, President of the Swedish Venture Capital and Private Equity Association, describes the development.
The Swedish Venture Capital and Private Equity industry got started during the second half of the 1970s. Companies and individuals have certainly invested in ideas and young enterprises far earlier than that, but approximately 25 years ago this came about under more organized forms. Venture Capital companies (VC companies) and VC funds were founded to support unlisted companies both economically and with an active owner involvement.
In the beginning of the eighties a first wave of venture capital with around thirty VC companies and several government funds swept in. The upturn of the stock market and the forming of the OTC-list in 1982 stimulated this development. The number of VC companies decreased during the second half of the eighties when the stock market cooled off and focus shifted more towards the property market. During the next few years the high interest rate made the high-risk investments, in unlisted companies, less attractive as an alternative compared to risk free interest.
During the 1990s the VC industry grew slowly until the last years of the decade when it increased sharply. Below you will find a summary of the development during the last few years.
Membership development
The number of Active Corporate Members in the Association has increased from 25 the year 1994, to 55 in 1998 to 155 in the year 2001. This pertains to the Active Corporate Members who invest in unlisted companies with an active and time-limited ownership engagement. As of September of 2002 the Association has 140 Active Corporate Members who make direct investments, which entails a decrease of approximately 10% since the preceding year.
Bringing to mind the substantial decline of the financial markets since the spring of 2000, a decrease of 10% of the number of actively investing members is not particularly remarkable. On the other hand, the number of members who have resigned and the number of new members is quite extensive. During the period of January 2001 to September 2002 50 investing members have left the Association and 40 new members have joined. Among those who have left the Association 36% are smaller, private VC companies, 20% are the VC companies of IT-consultants and 16% were bought and syndicated by other VC's. Among the new members a majority focus on early-phase investments, 26% have International origin but are active in Sweden, 26% have a focus on the IT and Telecom sectors, 26% invest with private capital, 16% are larger corporate VC's and 12% are focused on Life Science. In spite of our experiencing the largest decline ever on the stock market, new players are entering on the Venture Capital venue.
Level of activity
During 2001 80% of the VC's made investments in new companies, and 90% made follow-up investments in existing portfolio companies. 48% made investments of 10 MSEK or more in new companies, and 42% made three or more investments in new companies. Since we began doing our quarterly surveys in the first quarter of 2001, between 55% and 67% have made some investment each quarter, but a mere 13-28% have made three or more investments per quarter.
Facts on the VC-companies, capital, focus and fundraising
The Active Corporate Members who make direct investments in unlisted companies have a total of 190 billion SEK (US$20 billion) in funds under management, of which 111 billion have already been invested (in a total of approx. 2 300 investments). The funds under management among the VC's who focus on the growth phases amount to approx. 100 billion SEK, of which 53 billion are invested. The remaining 90 billion are managed by the companies focused on buyouts, and have invested 58 billion SEK. According to the latest quarterly survey, quarter 2 of 2002, 25% of the VC's were interested in investing in the seed-phase, 57% in start-up, 75% in the expansion, 16% in replacement capital and 25% in buyouts. This does, however, differ quite markedly from how the companies in fact have invested, as is accounted for below. We estimate the number of persons responsible for investments in the VC-companies to approx. 600, of which 59% have an industrial background and 11% are women. The total of funds raised for the VC's was 16 billion SEK in 2001, of which 72% are earmarked for buyout investments and 26% for the growth-phases. Industrial companies stood for 22% of the capital, pension funds 18%, insurance companies 15%, banks 13%, private individuals 11% and public (state-funding) 7%. Only 34,5% of the total funds raised came from Swedish sources.
Investments- phases and industry sectors
Apart from the Association's own surveys, we also support the large European survey that is conducted every year by Öhrlings PricewaterhouseCoopers on behalf of the European Private Equity and Venture Capital Association (EVCA). Among the figures presented for Sweden are the following: Investments in billion SEK were 11,2 in 1999, 19,4 in 2000 and 18,9 in the year 2001. The number of investments was 610 in 1999, 569 in 2000 and 439 in 2001.
Of the number of investments made in 2001 (figures in the parentheses show the preceding year) 9,3% (14,3%) were in the seed-phase, 33% (49,6%) start-up, 46,6% (30,1%) expansion, 4,4% (1,1%) replacement and 6,7% (4,)%) buyout.
Of the amount of capital invested in 2001 1,2% (1,2%) went to the seed-phase, 10,5% (8,7%) to start-up, 32,5% (14,5%) to expansion, 5,2% (0,1%) to replacement and 50,6% (75,5%) to buyout. Initial investments corresponded to 34,4% (64,2%) of the number of investments made and 67,1% (87%) of the amount of capital invested, the remainder went to follow-up investments in existing portfolio companies. The number of investments in both the seed and start-up phases have been halved from the year 2000 to the year 2001, and the invested amounts in the expansion phase has increased dramatically.
In the survey that the Swedish Venture Capital and Private Equity Association (SVCA) and the Swedish Business Development Agency (NUTEK) carry out each quarter since the first quarter of 2001, we can note a number of interesting trends. During the first two quarters of 2002 the initial investments decreased further and represented a mere 24% of the number of investments made and 57% of the invested amount of capital. During these two quarters initial investments in the growth phases seed, start-up and expansion totalled 900 million SEK, which is a 33% decline compared to the preceding year what pertains to invested amount, and approximately 50% decline of the number of initial investments in the growth phases.
Most dramatic is the decline in the seed-phase where the number of investments has decreased for six quarters in a row, from 27 seed-investments to a total of 125 million SEK during the first quarter of 2001 to 4 seed-investments to a total of 13 million SEK during the second quarter of 2002.
Information Technology attracted the most investments in 2001, where Computer related investments represented 30% of all investments made and Communication 17%. Investments in Life Science increased to 19% of the total, and Biotech represented 4%. The most capital was invested in Chemicals & Materials, 29%, followed by Manufacturing, 14%, and Computer related at 13%. During the first six months of 2002 the following sectors have attracted the most investments:
IT/ Computer, software: 39, Communications, other: 26, Internet Technology: 19, Biotech: 18, Medical technology: 18, Telecommunications, hardware: 17, IT/ computer, services: 17 and Industrial products and services: 14.
Investment trends - syndications, geographical distribution
During the first two quarters of 2002, the share of syndication has been 65%. The VC's have made 148 investments together with one or more other investors, and 79 investments without a syndication partner. The most common form of syndication is when two VC's participate in an investment, and in 48 of the investments, that is more than every fifth investment (21%), a foreign VC participated. According to the EVCA's survey the preceding two years show that the syndications amounted to a mere 40% of the investments and in 1999 only 13% of the investments were syndicated. During the first six months of 2002 16% of the investments were made outside of Sweden. The most investments during this period were made in the Stockholm area: 43%, followed by Gothenburg at 16%, the Malmö/ Lund region 7%, Uppsala 6% and 13% went to other regions in Sweden.
Divestments (exits)
The total number of divestments during 2001 was to 129, and the total amount of capital divested was 8,2 billion SEK. Trade sales dominated entirely with 76% of the capital divested, followed by sale to financial institution with 8% and IPO a mere 4%. During the first six months of 2002 63 divestments were registered at a total amount of 1,5 billion SEK. The most common form of divestment has unfortunately been bankruptcy, 23 corresponding to 37% of the whole year's total number of divestments, followed by sale to financial institution with 35% and sale to industrial buyer 22%. 40% of the VC's made no divestment at all during 2001. The correspondent figure for both the first and the second quarter of 2002 was 66%.
Other
Each year the EVCA present a list of investments in private equity and venture capital in relation to each member country's Gross Domestic Product. In the current list over investments in 2001 Sweden comes in at first place with 0,87% of the GDP, followed by Great Britain with 0,65% and the Netherlands with 0,44%. Even if the buyout segment is excluded Sweden still comes first with 0,43%, ahead of Great Britain at 0,28% and the Netherlands at 0,24%. However, when compared to the USA we are still lagging behind. In the US 0,6% of the GDP was invested in venture capital in the year 2001 (buyouts excluded). The relative strength of the Swedish venture capital industry is, of course, small comfort to all the entrepreneurs with new projects that today are having difficulties in acquiring venture capital. To specifically support the early stages we must follow the example of many other countries here in Sweden as well, and as soon as possible introduce fiscal incentives that can stimulate to more investments in young, unlisted companies that are of immense importance for the country's growth and where the need for capital and competent active owners is the largest.
The fact is that our fiscal system through the so called 3:12 rules often claim a higher tax for investments in unlisted companies with an active ownership engagement, than passive investments in listed companies. For the VC's changes in the fiscal regulations would be of great importance so that realized means from a divestment can be invested in new companies without tax having to be paid at every instance a portfolio company is sold at profit. Even indirect investments need to be encompassed by such a tax-exemption as many of the venture capital funds are being managed as limited partnerships with one partner assuming unlimited partnership or unlimited partnerships. The partner assuming the unlimited partnership should pay the capital gains tax as income of capital. Such limited or unlimited partnerships should not be tax subjects, as this would hinder tax-exempted pension funds and such from investing in Sweden. The regulations for investment companies should be changed as well, so that they can encompass even venture capital companies that are focused on specific phases and segments. The important thing is to create tax neutrality versus foreign investors. A result of the fiscal environment of today is that many companies and private individuals choose to leave the country, and with that unfortunate development increases the risk that Swedish growth companies do not acquire the financing and support they need.
Tom Berggren
President of the Swedish Venture Capital and Private Equity Association
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