Tough times for the mid-market?

Confidence levels of mid-market VCs have dipped significantly during Q2 2005, according to a survey of mid-market VCs conducted by Grant Thornton Corporate Finance. In Q1 2005, most VCs predicted deal values and volumes would either remain stable or increase over the next 12 months. During Q2, 65% and 70%, respectively, anticipated such activity.

In terms of sectors most likely to witness intense M&A activity during the next 12 months, for the first time in over a year the healthcare sector (22%) was singled out as being the most popular, followed by business services (20%), which normally takes the top spot and financial services (10%).

In terms of deal volumes: 30% of respondents expect the number of transactions to decrease over the next 12 months, compared to just 2% during Q1; 51% anticipate similar activity levels whilst just 19% predict an increase.

Looking at future deal values over the next 12 months, 35% expect a fall in market valuations, (5% in Q1), 39% anticipate consistent levels (50% in Q1), while a further quarter take the view that valuations will increase in the year ahead.

“The bullish optimism that we have witnessed in the private equity industry during the past 18 months has receded during the second quarter of the year,” says Mat Bhagrath, partner at Grant Thornton Corporate Finance. “The recent slowdown in consumer spend and sluggish economic growth during recent months is adversely affecting M&A activity, which is reflected in the fact that a third of VCs are predicting a downturn in the volume and value of deals during the next 12 months.”

A liquid debt market and oversubscribed funds are ensuring that VCs’ appetite for deals is still strong. However, the scarcity of quality companies to buy, a drop in consumer spend and an uncertain economic outlook is reflective of the shift in sentiment between bullish confidence and cautious optimism the venture capital market is experiencing. And this combination of factors may lead to a slowdown in the number of deals carried out in the second half of this year, according to Bhagrath.