VCs prepare for £150m Scottish spending spree

SCOTTISH companies can expect to receive up to £150m in investment next year as venture capitalists seek to spend their growing cash piles, according to industry estimates.

City firms are gearing up for a raft of new deals after clearing their portfolios of underperforming investments, and institutions, including Lloyds TSB Development Capital, have pledged to look for old-economy investment opportunities north of the border.

A total of 19 deals worth £92.5m (€147m) have been recorded in Scotland so far this year, according to Initiative Europe, the private equity research group. The figure is less than a quarter of last year's £440m total, but that was flattered by the £208m private equity-backed Kyndal management buyout of the distiller White & Mackay.

Professor Richard Harrison, who holds the Dixons chair of entrepreneurship at Edinburgh University, warned that official figures often only picked up a fraction of activity.

Research two years ago suggested that deal activity was twice the level suggested by the British Venture Capital Association because it missed out angel investments and cash injections by non-members.

Brian Rett, the head of structured finance at HBOS, said that oil and gas deals had kept the private equity market going, but he believes that next year Scotland will not receive more than the £262m invested in 2000. Other industry analysts predict £80m to £150m of deals.

Craig Wilson, the head of structured finance at HBOS, said that the flow of potential deals was huge, but transactions were being delayed by price.

"It seems vendors are all too frequently holding out for more money than they can reasonably expect to get for those businesses, and quite often appear to be less than committed sellers," he said.

"Venture capitalists are wholly justified to hold out for more value."

Steve Carle, a director at LDC, the former Lloyds TSB Development Capital, said: "We are going to spend more time looking at Scotland. There is an opportunity for the more traditional management buyout or buy-in market. Some of the gloss has come off the technology scene. There may be more of a focus on the old economy-type deals.

Keith Arundale, the European venture capital leader of the technology group at PricewaterhouseCoopers, predicted an increase in investment activity after firms spring-cleaned their portfolios.

"By the end of the year, most of venture capitalists' under-performing investments will have been written off and they will start to make new investments," he said.

Many firms are sitting on huge cash piles. Candover, for example, has closed its 2001 fund, which is worth £1.71bn (€2.7bn).

Aberdeen Asset Management said that it has up to £45m to spend in Scotland this year and Scottish Equity Partners said it will look to invest 25%, or £18.5m, of its SEP II fund in Scotland.

The private equity teams at Royal Bank of Scotland have been making deals under the radar of most observers. Johnny Cameron, the chief executive of Royal's corporate banking and financial markets division, said: "The general trend has been focusing on the big deals.

"The smaller deals do not get quite so much attention. We have quietly got on with it. We have done two or three smaller deals in the past year."

ben.griffiths@businessam.co.uk