Venture capital is catching on in other parts of the world, but outside the usual places, VC investments are still just a drop in the worldwide bucket. Red Herring compares and contrasts South Africa, Canada, and Latin America. “We’re coming out of a trough,” says Richard Frank, CEO of Darby Overseas Investments, one of the most active firms in Latin America, and chairman of the board of directors of the Latin American Venture Capital Association.
November 15, 2004 Issue — Venture capital is catching on in other parts of the world, but outside the usual places, VC investments are still just a drop in the worldwide bucket.
Although South Africa’s private equity industry didn’t officially materialize until 1999, the country has caught up quickly with the rest of the world. The entire continent of Africa only accounted for 2 percent of worldwide venture capital in 2003, but South Africa ranked No. 18 for investment levels, according to PricewaterhouseCoopers (PWC).
VC in South Africa has grown slowly but steadily since 2000, when there was a total of $5.64 billion in funds under management, according to the South African Venture Capital Association. As of December 31, 2003, South Africa’s private equity industry had $6.65 billion in funds under management, a 10 percent increase over the previous year; 2001’s total was $5.95 billion.
Last year, South Africa saw a sharp turnaround in fund-raising activity after four years of significant declines. In 2003, $980 million worth of funds was raised, with $860 million of that going towards later-stage deals. In 2002, only $210 million was raised, which followed $280 million and $180 million raised in 2000 and 2001, respectively. There was also record investment activity by private equity firms – 2003’s $720-million total is a 26 percent increase from 2002’s total of $530 million.
With South Africa’s lingering history of Apartheid, it is worth noting that in 2003, the total funds under management with black-empowered enterprise (BEE) credentials – at least 25.1 percent black-owned – reached $830 million, with $310 million of that total coming from black-owned enterprises (BOE), or those that are at least 50.1 percent black-owned. In 2002, $500 million of funds under management had BEE credentials, with $210 million going to BOEs.
Even after VC levels began to stabilize in other countries, Canadian venture capital continued to decline, falling from $3.7 billion in 2001 to $2.5 billion in 2002, and hitting just below $1.5 billion in 2003, according to Macdonald & Associates, which tracks venture capital across the country.
Canada’s investment levels fell from the fourth-highest worldwide in 2002 to ninth last year, according to PWC’s Global Private Equity Report. But according to Mary Macdonald, president and CEO of Macdonald & Associates, Canada’s venture capital industry is showing signs of recovery.
The rolling four-quarter average (the average of the previous four quarters) picked up modestly in the first quarter of 2004 for the first time in 12 quarters, says Ms. Macdonald, and it increased again in the second quarter. From April to June, investors poured $375 million into Canadian companies, up 48 percent over the same period in 2003, but 8 percent lower than the $407 million invested in the first quarter of 2004.
“You’re seeing a return in confidence,” says Mike Darch, executive director of the Ottawa Center for Research and Innovation.
One indicator of the optimism is a recent surge of interest in early-stage firms. More than half of Canadian companies receiving money in the second quarter of 2004 were early-stage companies, taking in 41 percent of all second-quarter investment money, according to Macdonald’s statistics.
Investors also are distributing their funds to a broader range of companies now, including software, life sciences, and semiconductors, says Mr. Darch, instead of concentrating primarily on communications and networking as they did five years ago.
And just like in the United States, Canadian venture capitalists have learned their lesson. “What people are looking for is not a technology that’s going to change the world four years from now,” says Mike Darch. “Investors have to see that it makes sense in today’s market.”
In Latin America, venture capital investment peaked at about $3.7 billion in 1998, but has plummeted in the last few years, totaling less than $400 million in 2002, according to Venture Equity Latin America (VELA). In 2003, Central and South America accounted for about 1 percent of all global venture capital, according to PWC. From 1998 to 2002, just under $10 billion was raised and invested.
“We’re coming out of a trough,” says Richard Frank, CEO of Darby Overseas Investments, one of the most active firms in Latin America, and chairman of the board of directors of the Latin American Venture Capital Association.
The VC industry in Latin American really is still in an early stage of development, says Mr. Frank, and focused on “bread and butter technology plays” like enterprise software. And the biggest challenge facing venture capitalists across the continent?
Strong family ties, which make many family-run businesses reluctant to give controlling interest to investors.
Some predict that Latin America will raise $1 billion in new capital this year, though Mr. Frank is skeptical. “But it wouldn’t surprise me,” he says. “It will certainly be $500 million or north of that.”