FINNOV

Venture capital has been identified as a key enabler of growth in modern knowledge-based economies and has figured prominently in the European innovation policy debate. Its challenges remain, however, substantial. Firstly, private equity markets are still very unevenly developed across the European region. Secondly, they are differentiated markets with highly heterogeneous distributions of investments not only by country, but also by sector and investment stage, resulting in rather different innovation-financing architectures. Thirdly, the profitability and sustainability of private equity – and venture capital in particular – are being severely tested by the current financial crisis. In this paper we use transaction-level panel data on investments and exits by private equity funds to analyse the composition and evolution of European VC and buyout markets between 1990 and 2010. We explore their long-run geographical, sectoral, investment stage and divestment/exit trends. We then evaluate the short-run reaction of the sector to the current crisis and conclude by reflecting on its future prospects from a financial and innovation policy perspective.

Keywords: Venture capital; buy-out; private equity; investment stage; divestment; financial crisis; innovation policy.

JEL Classification: G24; O16; O52; F30