Special Report on Venture Capital: Stubborn investors ready to go with the flow: After quiet years of institutional reluctance to invest in unquoted firms, fund-raisers are again out in force. Alison Eadie reports

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CONFIDENCE is returning to the venture capital industry - which backs unquoted companies from start-ups to management buy-outs - in asking institutions for money following the stream of successful realisations over the past year.

The British Venture Capital Association (BVCA) labelled 1993 the year of the venture- backed flotation. This year may mark the return of the fund-raiser. Independent venture capital firms, which account for some 45 per cent of venture investment in the UK, raised pounds 380m last year, a 24 per cent improvement on 1992 but a far cry from the record pounds 1.7bn committed in 1989.

After three quiet years, char acterised by institutional reluctance to invest in unquoted companies, fund-raisers are out in force. Up to 40 BVCA members are doing the rounds of institutions, including most of the big buy-out funds. Captive funds - bank, insurance company and pension fund subsidiaries - are also increasing their commitments.

Ron Hollidge, chairman of the BVCA and managing director of Lloyds Development Capital, believes the indications are that up to pounds 1bn could be raised this year by independents: 'With the economy moving out of recession, a buoyant stock market and the recent initiatives in the November Budget, we hope to see a flow of new money into the venture capital sector.

'However, it is vital that we continue to lobby the resource holders of the merits of venture capital being considered as an alternative asset class and that it is a distinctive and strategic type of investment.'

The attitude of UK institutional investors is stubbornly negative, according to Mr Hollidge. European and Far Eastern markets are also difficult. Only in the US is there a willingness to look at and invest in UK ventures, he says.

The revival of the new issue market should help the cause of this year's fund-raisers. Figures from the BVCA show that in the year to June 1993, 48 per cent of all stock market flotations were venture-backed. The new issue market gathered pace in the second half of last year with more than 30 venture-backed companies floating, including Sharelink, BSM, Allders and Virtuality.

The buoyant stock market has its downside. Prices, particularly of larger buy-outs, have been influenced upwards by high price/earnings ratios of quoted companies. Ready cash availability among the large buy-out funds has fuelled the rise, as venture capital houses have fought over the same deals.

The small to medium sized end of the market, where there is less competition and less cash chasing the same deal, has been less affected. F & C Ventures reports total investment last year of pounds 21.3m, a 21 per cent rise over 1992. It believes deal flow will strengthen as the UK economy recovers.

3i recently warned of poor demand. Although it has more than pounds 500m available in long-term investment funds, it has yet to see an upturn in demand for capital. The expected need for development capital has yet to materialise, possibly because of the slowness of economic recovery.

Trevor Jones, managing director of Gresham Trust, said confidence among entrepreneurs was at its highest for three years. He identified a new source of demand from existing venture-backed companies, whose investing institutions wanted out. If the business was not suitable for a stock market flotation and management did not want to lose its independence via a trade sale, a venture refinancing provided the answer.

The shape of the industry may continue to change, but not dramatically. Mr Hollidge points out that, as well as rationalisation over the past two years, there have been new entrants at the smaller end of the market. Current full BVCA membership stands at 120, only fractionally below the all-time high.

Polarisation is expected to continue. Large buy-out funds are diverging from those concentrating on small to medium sized deals and expansion capital. Mr Hollidge hopes technology specialists, which have reduced in number, will show a revival as a result of successes in the new issue market.

Venture capitalists are still debating what to call themselves. Purists believe the term 'venture' should only apply to early stage investment. Private equity, investment capital and development capital are the preferred alternatives. Some players have already changed their names. Others may soon follow.

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