MARKET COMMENT
Become A Venture Capitalist

By David Kuo (TMFDragon)
May 15, 2003

Venture capitalists seem to figure quite regularly in the news these days. You can't pick up a financial newspaper without bumping into CVC Capital Partners, Cinven, Apax Partners or Hicks Muse Tate & Furst, for example. My personal favourite is Kohlberg Kravis Roberts & Co, simply because they sound so Gordon Gekko-ish, though I'm pretty sure there's nothing red braces and Michael Douglasy about them at all.

Venture capitalists, as the name suggests, are people or companies who provide capital for business ventures. Those ventures could be start-up businesses, smaller companies looking for capital to expand, or larger outfits that are finding it difficult to raise money elsewhere. Venture capital is also used to finance many of the management buyouts that we hear about. More recently, venture capital has been used to acquire the non-core assets being off-loaded by many established businesses.

In general, venture capital comes from groups of wealthy individuals who pool their money together. So unless you have a spare million pounds or so, you are unlikely to get too much of a look in. However, in the UK, we are fortunate to have one of the leading venture capital companies listed on the stock market, namely 3i Group (LSE: III).

3i, which reported results this morning, is invested a portfolio of businesses, predominantly in Europe, that total some £4b. This figure is down from the portfolio of £5.1b last year, largely as a result of a revaluation of investments. The portfolio presently comprises technology start-ups, which account for 15% of the total portfolio, and growth capital for more established firms, which takes up 34%. Just over half the portfolio is made up of management buyouts.

3i's current net asset value per share was reported at 480p, and its shares today trade at an 8% premium to that figure. In March, the shares were on offer at 416p, a discount of 15% to its net asset value. On the face of it, the shares no longer look that cheap. However, that depends greatly on your outlook for the stock market over the longer term.

A depressed stock market allows venture capitalists, such as 3i, to acquire businesses cheaply. However, it also reduces, at the other end, the prices that they can get for selling companies within its portfolio. What is undeniable, though, is that venture capitalists are now more focused on acquiring profitable businesses, which might be suffering from the downturn in the economic cycle. That would account for 3i's shift in emphasis from riskier start-ups to the more dependable management buyouts. All in all, today's business climate could augur well for 3i's net asset value over the long haul.