WHEELING & DEALING
Where In The World Is The Money?
By Jean-Marc Levy

First published in HRO Today (July-August 2003)
 

Investors and capital seekers are still dancing an uneasy mating dance.

In my December 2002 column, "A Buyer For Every Seller," I made the case that in spite of gloomy private equity, venture capital, and M&A outlooks, well-positioned companies in the Human Capital Management segment would continue to be able to find merger partners and to secure capital as needed. Six months later, as the environment has gone from gloomy to dire, and as industry experts are still debating whether the market has finally found its bottom or is just on a short break before a descent to new depths, it is time to reopen the case.

To listen to the noise coming out of the investment management community, things are still pretty grim. Entrepreneurs are complaining about the hoops they have to jump through to elicit any kind of interest from VC's. Private equity investors continue to bemoan the fact that they have too much money and too few good deals in which to invest. And VCs are still waiting around for valuation expectations to sink back to more realistic levels.

It's not like there isn't enough money to go around either. Depending on whose estimate you believe, the private investment overhang (the amount of money already raised and sitting in private equity and VC coffers, waiting to be invested) is anywhere between $80 billion and $150 billion. You would think that raising a few million dollars to launch a new venture needn't be that hard. And yet, let's look at the facts: according to the MoneyTree™ Survey released by PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association, only 623 ventures received venture capital funding in the first quarter of 2003. This, according to the survey, is the lowest level of activity seen since the third quarter of 1996. PwC/TVE/NVCA quoted "the uncertainty of economic and global conditions" as a key driver of the decline in activity. Since it is hard to envision a rapid end to "uncertain economic and global conditions," this does not bode well for better days to come. In the already depressed world of M&A, the statistics are even more sobering. According to Mergerstat's M&A activity report, the number of U.S. transactions recorded through the first five months of 2003 was down a whopping 59% from the same period in 2002, bringing M&A dealmaking activity down to levels unseen since 1994.

Still, the good news, at least for the readers of this magazine, is that an informal survey of VC's and private equity investors, reveals that favorable fundamental trends continue to make business services and human resources outsourcing a relatively bright spot in an otherwise depressed private investment sector.

A continuing trend, according to Venetia Kontogouris, a Managing Director with Trident Capital, and a frequent investor in information and business services companies, is the acceleration of the transfer of critical outsourced functions offshore. Says Kontogouris, "This is the result of many factors including better communications, well qualified offshore labor and improved confidence in the concept of third party management of mission critical business processes."

Buck Goldstein, a partner with Mellon Ventures, the large private equity group with over $1.4 billion under management, agrees wholeheartedly, and adds "We believe business process outsourcing is a significant worldwide mega-trend as companies are seeking to return to their core competencies and are examining all activities they deem non-core. Information technology and the web provide tools that enhance the value of knowledge workers no matter where in the world they are located, and advances in IT will facilitate collaborative activities to a degree that is unprecedented."

Oh, and one last tip - while all the investors surveyed were upbeat about the outsourcing space, they still had one final piece of advice for entrepreneurs and business sellers: great sector fundamentals and business models are key, but if they don't come along with realistic valuation expectations attached, don't bother knocking on our doors.