US economy suffers further blow as Asia steals its venture capital crown

YET more bad news for the US economy: Silicon Valley, favoured haven for the venture capitalist, has been dethroned by Asia. That, at least, is what many analysts are now arguing, even if venture capital (VC) data is notoriously opaque, as befits all forms of private equity.

VC funds outside Europe and America – nearly all of them Asian – which began investing money in 2003 have achieved an impressive internal rate of return (IRR) of 20.6%, according to Private Equity Intelligence.

Such buoyant figures are in dramatic contrast to US funds of the same vintage, which have notched up miserable IRR of -0.4%. European funds set up in 2003 made returns of 8.3%. (Data for more recently established funds is not meaningful because funds have not had enough time to bear fruit.)

In Britain, VC funds chalked up returns of 13% on UK exits last year, according to a report by Library House, a research group that tracks the sector.

Simon Cooke, chief executive of Esprit Capital, a VC firm, says: “For every dollar invested, we are having more success in Europe than in the US.” One indicator is the number of successful exits – either sale of businesses to other companies or initial public offerings (IPOs) – achieved for a given initial investment.

On every $100m (£49.5m, e70.7) invested, European VC funds logged 9.1 successful exits, compared with only two in the US in the three years from the start of 2004 to the end of last year. VC firms had an average of 5.5 exits in China and 2.8 exits in India. In Israel, a country with a substantial IT sector, the average exit rate was 1.8.

If Asia’s performance can be explained by rapid growth, the American market is becoming saturated. The onerous Sarbanes-Oxley accounting rule is deterring smaller firms from making their debuts on US markets. Consequently, American VC investors are heading abroad. “The most exciting export from Silicon Valley is its entrepreneurial spirit,” says Cooke.

One way for investors to tap VC’s returns is to buy into UK-listed venture capital trusts (VCT), which carry generous tax breaks and focus on business start-ups (investors get 30% income tax relief on investments so long as they keep cash in a VCT for five years).

There are dozens of such trusts, though they only hold UK companies; to get exposure to global returns one option is the Macquarie Global Private Equity Securities fund, a UK-registered retail fund that holds some international VC investments as well as buyouts. Buying shares in 3i, the FTSE 100 investment company, is an obvious alternative.

To put money directly into a private VC fund is trickier: these typically only raise money occasionally and are open to investors able to commit large sums, such as £1m.

These days, there is only one rule in VC: avoid America.

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