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Venture capital to provide lifeline

A BALLOONING venture capital industry will prop up an otherwise lacklustre year for mergers and acquisitions.

Takeover activity dropped for the first time in eight years during 2001 as a consequence of the US recession and momentum was likely to remain subdued in 2002, according to the annual Ernst & Young Corporate Finance Mergers & Acquisitions Index.

However, activity will not fall as much as in the rest of the world, where M&A activity levels have dropped by up to 50 per cent.

Ernst & Young corporate finance head Martin Alciaturi said Australia had, in the past, relied heavily on overseas buyers to create and foster domestic M&A activity.

“We expect it will take at least another six to 12 months before confidence is restored to previous levels,” he said.

“The Australian market, under-pinned by strong business confidence, will continue to fare better than international markets.”

M&A’s were led by high-profile activity in the resource sector, including BHP’s merger with Billiton, the contested takeover of Normandy Mining, Delta Gold’s merger with Goldfields and Woodside’s bid for BP’s Veba Oil & Gas.

Mr Alciaturi said the index also found that venture capital buyers were likely to drive M&A activity during 2002.

“Last year was a significant one for the VC industry as institutional buyers completed a number of larger deals, such as the buyout of Just Jeans, the acquisition of operating divisions from Pacific Dunlop and the offer for Scientific Services,” he said.

“Less competition from offshore buyers and low interest rates encourage deals that involve venture capital.”

A report into the venture capital industry by the Australian Bureau of Statistics found approximately $685 million was invested in new projects during 2000-01, while additional investments in existing projects rose $202 million to a net investment by venture capitalists of $2.7 billion.

Question marks over the health of the venture capital industry remain, however, with venture capitalists downgrading the value of their investments by $84 million during the year.

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